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6

Social contract theories

Pedro Francés-Gómez^*

Originating in the works of political philosophers such as Thomas Hobbes, John Locke and Jean-Jacques Rousseau, the modern social contract tradition received renewed attention in the twentieth century in the works of James Buchanan (1975), John Rawls (1971) and David Gauthier (1986). The underlying idea is that practical authority must ultimately be derived from individual consent. Contractarian business ethics (henceforth, CBE) takes classical and contemporary theories of social contract as models for normative business ethics theory. This chapter covers the tradition of contractarian business ethics from the appearance of Thomas Donaldson’s Corporations and Morality (1982) to current debates.

Before delving into this “tradition” of business ethics, a brief taxonomy of social contract theories and their employments in business ethics is presented. After this initial roadmap of the territory, the chapter turns to the justifications of the social contract in business ethics. The third section sets forth the major elements common to CBE theories. The subsequent section focuses on the influential theory of Thomas Donaldson and Thomas Dunfee, the Integrative Social Contracts Theory, followed by section five that is devoted to developments and criticisms of this theory. A sixth section summarizes other approaches to CBE. A concluding section summarizes significant critical stances towards CBE and indicates new directions of inquiry within the tradition.

A taxonomy of social contract approaches

The general idea of the social contract in ethics is that a certain prescription is morally obligatory for the agent if it derives from an agreement to which the agent herself can rationally consent. The first distinction is between actual and hypothetical contracts. Within actual contracts, consent may be explicit (as when an employee signs a code of ethical conduct as part of her contract with a company) or implicit. If implicit, the will of the consenting party must be inferred from her conduct: for example, acquiescence to company (or market customary) attitudes and behavior, willing participation in certain benefits, and so on. Hypothetical consent refers to the agreement that the agent would have found rational to accept in an imaginary ex ante situation. The so-called “original position” is often imagined as an earlier time when relevant conventional norms did not exist, and knowledge about individual real circumstances was null or limited.

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Most social contract theories in political and moral philosophy are of the hypothetical variety (Kersting 1994). In this way, the social contract works like a mental experiment that helps us to understand the demands of practical reason in relation to a certain normative question: what are the limits of state authority? What is a just society? In business ethics the normative questions may be, for example: What is the ethical basis of economic activity in general? What are the moral rules for international commerce? How should a corporation be governed?

Both actual and hypothetical social contract theories assume that normative authority derives from the consent of individuals. One crucial difference is that actual consent can be revoked or reversed as a matter of fact, while hypothetical consent, as an attempt to capture the demands of reason, is thought to represent unchangeable principles.

Based on the work of Harvard philosopher Thomas Scanlon (1998), social contract theories have come to be described as “contractual” or “contractarian” (Ashford and Mulgan 2012). The contractarian version of the social contract, which assumes that individual rationality equates to self-interest, tries to derive morality out of an agreement among self-interested agents (Gauthier 1986). On the other hand, the contractual version, drawing upon Kant’s account of the social contract, assumes that moral agreement is based on mutual recognition as rational autonomous agents sharing basic moral capacities.

Within the territory of business ethics, the social contract typically adopts at least three forms that differ according to who are the parties to the agreement and what the object of agreement is about:

According to version 1, a social contract may include businesses and markets as basic social or legal institutions; this contract would specify the normative framework for these institutions, including the ethical framework. Businesses and their market activities are in this case the object of agreement. In version 2, there is a reciprocal relationship between civil society and businesses: civil society gives businesses legitimacy and—through the legal system—protection of private property; in turn, businesses deliver goods and services, jobs, and public revenue through taxes. However, in version 3 the general framework of free market and capitalism is taken for granted. In this context, the question is whether and under which conditions individual agents would agree to create hierarchical organizations for economic purposes. The idea is that business firms, and in particular large corporations, are the product of an original contract among all the parties involved, that is, all stakeholders.

The social contract in business—in any of these versions—has been used to lend support to normative stakeholder theory (Mansell 2013). However, there is no logical connection between the social contract argument and the stakeholder approach to management (Boatright 2000). Contractarian business ethics may be supportive of any approach to management, or it may be neutral. In fact, social-contract scholars tend to support stakeholder theory, and Edward Freeman has employed Rawlsian notions of contract to defend his view about the corporation (Freeman 1994; Freeman and Evan 1990).

Finally, Gjalt De Graaf (2006) introduced a distinction between constitutive and heuristic uses of the social contract. The constitutive use assumes that moral obligations are established by the social contract. This would be obvious in actual social contracts, and less so in hypothetical versions. The heuristic use takes the social contract as an epistemic tool: it helps us to discover or clarify our obligations, but it does not purport to explain or justify their origin.

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These distinctions are often blurred. It would be impossible to find one theory that can be squarely classified in one side of each of the several taxonomies. However, these distinctions may be useful in describing the approaches below.

Justification of the social contract theory of business ethics

The first question about the application of the social contract to business ethics is: Why is this philosophical foundation to be preferred to other moral theories? Scholars in the field usually refer to four types of reasons.

Theme 1 is mentioned by Dunfee and Donaldson (1995). The difficulties the (non-contractarian) approaches encounter in the field of business ethics are due to the “artifactual” and plural nature of modern corporations. Ethical theories were developed to deal with “natural” ways of life. This is why an attempt to apply broad ethical theories to “hard-core business problems, such as nepotism, bribery in Third World cultures, drug-testing, or insider trading, usually reach vague, unsatisfying conclusions” (Dunfee and Donaldson 1995, 173; see also Freeman 1994, 415).

Theme 2 focuses on the size and power of large corporations, their potential impact on the lives of millions, their bureaucratic nature and hierarchical structure. The exercise of power in the corporate context is analogous to the political exercise of power—in fact, according to the defenders of a “political” view of business ethics, corporate power is just one form of political power (Heath et al. 2010). This power is exercised over subjects that may not share a single view of the good life; in fact, they may not share the same culture, language, religion, etc. However, they are supposed to accept the legitimacy of their superiors’ commands and behave cooperatively in order to produce a certain collective result. The need for justification of the power exercised by and within these organizations is thought to be analogous to the need of justification of the political power of the modern state. The social contract is the model of justification of the modern state, therefore it suggests itself as a model for the justification of the power of large corporations.

Surely smaller companies are not analogous to modern states in the same way. However, the analogy is frequently extended, stressing that medium-sized enterprises are the daily arena of truly “political” struggles around issues like gender discrimination, cultural diversity accommodation, distribution of cooperatively-generated wealth, respect of labor and other individual rights, etc.

Along with analogies, there exist differences. Above all, the state is the supreme social institution. Remove the state and you get an anarchic “state of nature.” Therefore, the state must establish its own sovereignty. Firms, on the contrary, operate in a (more or less stable and legitimate) legal environment. You may very well remove one or all firms, and no anarchy ensues. The social-contract theorists generally argue that the analogies are sufficient to warrant the importation of the method from political philosophy. Taking as the main object of business ethics the large publicly owned corporation operating at a global level serves to reinforce the analogy (and the argument). Therefore, CBE is often presented as a philosophical argument for (or against) the legitimacy of large corporations.

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Theme 3 has been emphasized by Freeman (1994) but also by others (Donaldson and Dunfee 1999; Sacconi 2011a; Phillips 2003). Of the three branches of stakeholder theory—instrumental, descriptive and normative (Donaldson and Preston 1995)—it is the normative that concerns us here: stakeholders of the firm are entitled to a fiduciary relationship with the management analogous to the relationship that legally exists between shareholders and management. This claim runs counter to the formal definition of firms in most legal systems, and its usage gives rise to serious debate (Marcoux 2003; Mansell 2013). Defenders of stakeholder theory, therefore, would need a re-definition of the firm (Post et al. 2002). At this point, a heuristic use of the social contract might help to check whether a group of independent and rational agents would or would not consent to the sort of legal and economic system that gives shareholders the prerogatives they actually enjoy. Of course, it may be entirely possible that rational agents would reject stakeholding and choose exactly the economic system we now have, corporate law included. But the stakeholder theorist trusts that rational agreement would not legitimize the status quo.

Finally, reasons included in theme 4 have been put forward by contractarian scholars such as Lütge (2005, 2012b). Lütge stresses the fact that contractarianism requires weaker premises than any other philosophical foundation of business ethics, and those premises are common to the economic theory of rationality. His sort of contractarianism takes individual self-interest as the only normative premise. Lütge concurs with Heugens et al. (2006) that a contract approach is the natural one in the realm of business, where “contractual obligation” is a well-understood notion. Additionally, some of the work in CBE is done by using the tools of economics—game theory in particular (Binmore 1999).

A further related reason is that CBE is liable to some form of empirical validation (Dunfee and Donaldson 1995; Heugens et al. 2006). Empirical tests of normative theories may not be obvious, but a well-defined social contract theory must make some empirical assumptions about how individuals would behave in certain circumstances. Empirical discoveries can potentially support or falsify the theory or some of its premises (Faillo et al. 2015; Francés-Gómez et al. 2015).

How does it work? The elements of CBE

CBE comes in a variety of forms. It is worth having a statement of the standard way to understand the idea of a social contract of business. This section deals first with the CBE as a general method for business ethics, and then explains the key contractarian elements: the idea of a state of nature, or original position; individual rationality and rational agreement by unanimous consent; the content of agreement; the basic normative content of CBE theories; and the issue of compliance.

The social contract as a method of business ethics

The social contract can be seen as a method of ethics (Donaldson 1982: 39), a way to justify ethical norms. Dunfee and Donaldson (1995: 178) dubbed it a “critical theoretical tool.”

As a method, it has its rules. Ben Wempe (2005) argues that it has been used with little discipline and rigor in our field—although recent work by Lorenzo Sacconi (2011a, 2011b), Christoph Lütge (2015), as well as John Bishop (2008), represent an effort to discipline CBE. According to Wempe’s analysis, the argument should describe with precision,

Once these questions are clear, the social contract argument should be loyal to its internal logic, as defined by the premises and logical steps we describe below. In this logic, the key element is consent: “Consent is the justificatory linchpin of any social contract method, whether the contract proposed is hypothetical or real” (Dunfee and Donaldson 1995: 179).

The state of nature

Common to any description of the state of nature is the idea that the status quo represents a sub-optimal state. In Paretian terms, no person in the state of nature has anything to lose by shifting to a “social state.” If any individual would be made worse off by such a shift, then that would make unanimity, the only possible decision rule for an original contract, impossible. After all, if the original state were Pareto-optimal, there would exist no reason to abandon it, even if that state were unfair for a majority.

In CBE the “state of nature” was defined by Donaldson (1982) as a state of “individual production” inferior to a state in which all agree to allow the existence of firms provided that they respect employees’ and consumer’s rights. Agents in the state of individual production see themselves primarily as potential employees and consumers. Donaldson’s characterization of the state of individual production sets the standard for Rawlsian theories in business. Other common ways of imagining what the business state of nature looks like is to think of it as a state in which market failures prevail (Lütge 2015; Child and Marcoux 1999) or as one beset with transaction costs (Sacconi 2000). Freeman (1994) models his theory of “Fair Contracts” after Rawls’, and seems to accept Donaldson’s view of the state of nature as one with no or little value creation through business organizations. These accounts describe a real or fictional situation in which business transactions are less than efficient, so that all involved would benefit from agreeing to adopt new norms or institutions.

Individual rationality and agreement

The state of nature invites the construction of a cooperative scheme. By definition, in the hypothetical state of nature the social norms we seek to justify are absent; only individual will and individual rationality, operating through mutual consent, can be used as the cement of new societal schemes. An agreement among equals is the only way out. The same idea works in actual social contracts, with the exception that social rules may exist. Sometimes they make possible the new normative structure created by the contract.

According to the logic of the social contract, the parties in the original position engage in a process—it may be bargaining or deliberation—in order to agree on a cooperative scheme. The rules of this negotiation vary according to distinct versions, but it is common to assume that individual rationality implies some form of self-interest. Even in the contractual, as opposed to the contractarian, tradition, the parties are assumed to be defending their interests, and assuming that others do the same. The agreement must be, therefore, mutually advantageous.

Some thinkers use game theory to describe negotiation and its outcome. Sacconi (2011b) uses Nash bargaining theory as a proxy for rational bargaining. Lütge (2005, 2012a, 2012b) adheres to James Buchanan’s version of a rational constitutional contract, based on micro-economic analysis (Buchanan 1975). Others offer an argumentative defense of what they believe rational people would agree to in the “corporate state of nature.” Paul Neiman (2013) provides an effective illustration of this, with a theatrical representation of the hypothetical negotiation between a corporate shark and a community activist.

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Regarding the parties to the agreement, forms 2 and 3 of CBE leave ambiguous the identities of the contracting parties (Bishop 2008: 196). Donaldson (1982) provides an extreme example of such vagueness. At the beginning of the chapter when he introduces the social contract in business, he refers to an agreement between “business” and “society,” both taken as general abstract entities; however, in his illustration of such an agreement he refers to a tacit agreement between a single company (GM) and the whole of society. Moreover, as the chapter progresses, he introduces the “state of individual production,” populated by “rational people” who, the reader learns, are the ones drafting the contract. On the other hand, some scholars (Sacconi 2011a; Phillips 2003) are clear that their theories are about the firm, so that the contracting parties are those directly involved or affected: the stakeholders. Yet, even in these cases, the exact extension of these contracting parties is not easy. This can be considered an unavoidable characteristic of types 2 and 3 of CBE. After all, the standard social contract is applied to the state, and political communities are, once constituted, very precise about who is a citizen and who is not; so the standard argument can be reconstructed as an agreement among all the citizens, as exemplified only in form 1 of CBE. When the object of justification is not the political community, this precision is impossible. The very nature of business makes it an open activity. Even the business corporation, formally defined by its charter and nexus of legal contracts, is a fluid notion compared with the state.

The content of the contract

Social contract theories diverge about the content of the contract. Small differences in the characterization of the original position and the rationality of the contracting parties result in remarkable differences in the substance of any agreement. The content of the contract depends crucially on the aim of the theory (Wempe 2005). The aim determines how the premises are conceived and how the decision procedure is envisioned. But, in the case of CBE, there is no unanimity about theoretical aims. Wempe (2005: 128) proposes three questions that, due to their similarity with the questions addressed by the hypothetical social contract in political philosophy, could be chosen as the theoretical aim of hypothetical CBE: 1) the accommodation of mutually exclusive claims posed by different stakeholders (wages vs. dividends, and the like); 2) the weighing of incommensurable values when making business and economic choices (workplace safety vs. profit; environmental sustainability vs. economic growth); 3) the resolution of which background institutions will make cooperative behavior in business possible. (These three theoretical aims refer to no specific business norm or even a specific commercial institution; rather, these are general procedures for fair adjudication or fair dealing. For a more substantive content of the social contract, actual contracts would be required.)

A common way to express the general aim of the social contract is to talk of a distributive agreement. For example, in Rawls’ Theory of Justice, the aim of the original contract is to set up a mutually beneficial cooperative scheme, so the parties must agree about how to distribute all the benefits derived from cooperation. The object of the agreement is therefore a distributive principle. Once agreement is reached around this principle, the parties can design the cooperative scheme and the individual rights and responsibilities it involves in order to carry out that distribution in an efficient manner. In this way, the agreement can be seen, ex post, as instituting the moral rules of the group—the minimum morality implied by rights and duties—while the purpose of the contract, ex ante, remains, at least in the abstract, that of selecting a fair distributive procedure.

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Compliance

The fourth key element in CBE is compliance. It is one thing to accept the contractarian or contractual argument as a rational method of discovery or construction of the ethical norms that structure common life, but another to suppose that such argument can motivate ordinary agents to behave morally. This concern points to a challenge for the social contract method, especially its contractarian version which assumes a consent motivated only by rational self-interest: Since it may be rational to make a contract and then, at a later time, rational to break it, is there any way in which a priori consent can generate a moral motivation to comply with the agreed contract? Or must the contractarian, to insure compliance, argue for some independent source of moral motivation?

Some business ethicists seem to think that this concern is about a more general question—whether or not to accept or reject any moral constraints. Dunfee, for example, characterizes the problem thus: “A related, but distinctly different issue is whether individuals would in fact comply with the social contract. This is the standard “why should I be ethical?” question raised in the context of social contract theory. Assumptions that managers are often egoistic make this question particularly pertinent in business ethics” (Dunfee 1991: 29). Dunfee implies that, once we have a sound theory that justifies the obligations derived from the contract, then the only worry is that agents may reject their justified obligations due to their egoism. However, this sort of worry would seem to hold for any ethical theory; it is not particular to the social contract argument.

The specific worry about the social contract argument, especially its contractarian form, is that it rests the basis of obligation on individual rationality. This very rationality may preclude compliance! To put it simply: the source of the authority of ethical norms is the agent’s rational consent; consent is rational if the ethical norms secure mutual benefits; mutual benefit implies improvement over—at least, not degeneration of—the status quo for everyone. However, if the conditional of mutual benefit does not hold, then compliance with a contracted ethical obligation could be directly harmful for the agent (in the long run and all things considered) and, thus, the rationally self-interested agent may claim not to be obliged.

The social contract argument is not complete until this challenge is conveniently met. Sacconi (2011b) is the philosopher that most conscientiously completes his CBE proposal by meeting this challenge. His analysis starts with the assumption that economically rational individuals may deviate whenever there are incentives to do so in the ex-post situation. Deviation must be expected even if we assume that the agreement is fair, because a fair agreement may leave many ex post decisions open to the parties, in order to attain efficiency. Yet allowing such decisions would make the social contract unstable, since self-interested agents may use the leeway they have to improve their lot by exploiting others (recall that the contractarian argument assumes non-moral agents as the parties to the contract). Knowing of this eventuality at the moment of original contract, rational contractors may bring the issue of stability to ex ante negotiation. In so doing, they would focus on self-enforcing agreements, namely, those, and only those, that rational contractors know would elicit general compliance under normal circumstances and are therefore feasible ex post. Sacconi shows that stability, and therefore willing compliance, can be expected only around basically egalitarian solutions, where asymmetries of power are minimized.

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Despite Sacconi’s efforts, the most common way to address the issue of compliance with the social contract is to defer its solution to implementation policy at the level of real social contracts.

Integrative Social Contracts Theory (ISCT)

The result of the joint work of Thomas Donaldson (1982, 1989, 1994), who pioneered the adaptation of Rawls’ argument to business ethics, and Thomas Dunfee (1991), who had proposed that extant—that is, actual—social contracts are the source of business ethics norms, Integrative Social Contracts Theory (ISCT) purports to be a comprehensive theory of business ethics, covering foundational issues and applications, including norm identification and an algorithm for ethical decision. Additionally, the authors claim that the theory would justify stakeholder approaches (1999, Chapter 9), as do other scholars (Van Buren III 2001; Agle et al. 2008). The expression “integrative” suggests the nature of the theory: it is based on the idea of a “hypothetical social contract whose terms allow for the generation of binding ethical obligations through the recognition of actual norms created in real social and economic communities” (Dunfee 2006: 304). Extant social contracts are called “micro-social contracts.” The hypothetical social contract that lends legitimacy to these is labeled “macro-social contract.”

Their view is that rational contractors would accept the validity of community-based norms as long as they meet some conditions. The macro-social contract establishes the conditions under which micro-contracts can be taken as legitimate sources of ethical business norms.

Dunfee (1991) emphasized that business communities are ethical communities. Formal contracts and legal provisions are not the only source of mutual normative expectations common to commerce. Dunfee introduced the term “extant social contracts” to refer to the implicit agreements through which participants in economic practices tacitly accept common norms. These norms establish prima-facie duties for the members of the community. But the world economy requires some universal moral standards: minimum common rules that establish a framework for a global market. This minimum morality may challenge the legitimacy of some community-based norms. Although their account draws explicitly upon Michael Walzer’s (1994) idea of “thick” and “thin” moralities, Donaldson and Dunfee reject the charge of relativism as leveled against Walzer’s approach. Despite the community-based origin of actual ethical norms, they offer a validity criterion—the macro-contract—that purports to be universal and rational.

Why did they choose a hypothetical social contract to establish the universal minimum morality of business (the macro-social contract)? Donaldson and Dunfee argue that global business is pursued in a context of plural values. Therefore, the normative theory that supports or condemns extant social contracts must be valid for agents with different world-views and convictions. A social contract, by focusing only on the economic rationality of agents and on their mutual recognition as potential partners in business, may claim general acceptance.

The key concepts of the theory derive from its strategy of applying the hypothetical social contract to the justification/criticism of business practices. The parties to the hypothetical contract are economic rational agents seeking to establish the ethical basis for “today’s business world” (Donaldson and Dunfee 1999: 26). Unlike Rawls, the parties may know who they are, and what political, religious or philosophical options they embrace; the only veiled knowledge concerns the economic community to which they belong.

The agreement will be guided by the parties’ awareness that economic activity requires some ethical framework, and their knowledge that people possess bounded moral rationality: agents cannot typically pursue long arguments or complex calculations before every decision. Many times, they will have only partial knowledge of the facts before deciding. In these circumstances, usually the right thing to do is to comply with the relevant extant social contract—the normative view of the community to which one belongs. This is desirable for an additional reason: ceteris paribus, economic activity should be aligned with the cultural, religious or philosophical attitudes of the agents involved.

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This overarching macro contract would have four clauses: 1) Economic communities possess a moral free space. Within this space they can establish their ethical norms through one or several micro-social contracts. 2) The creation of norms at this micro level must be based on consent, and buttressed by a universal right to voice and exit. 3) Norms belonging to micro-contracts are legitimate—and therefore obligatory for the participants in the relevant community—if they are compatible with “hypernorms.” 4) In case of conflict between legitimate norms, priority must be established according to the spirit of the macro-social contract.

Except for the third clause, these contentions express procedural standards by which economic communities consent to substantive norms. These standards assume the value of individual autonomy by granting rights of voice and exit. Of course, it may appear that respect for individual autonomy reveals a substantial—as opposed to merely procedural—value. But it is possible to see voice and exit rights as a corollary of the notion of consent itself, so they would not essentially change the procedural content of clause 2.

However, clause 3, setting forth the notion of “hypernorms” remains the most controversial element in the theory, as the authors have readily admitted (see Dunfee 2006; Agle et al. 2008). These norms seem to introduce a genuinely substantive limit—one not based on agreement—on the content of the micro-social contracts. To be fair, not all hypernorms would be substantive in this sense. There are three types of hypernorms: structural, procedural and substantive. Structural hypernorms have to do with background political and social institutions (property law, for example). Procedural hypernorms refer to the conditions that make micro-contracting possible. The rights of voice and exit are examples of these. Substantive hypernorms, however, include fundamental concepts of the right and the good such as promise-keeping, truth-telling, and respect for human dignity. This type of hypernorm poses a problem for the hypothetical social contract argument, as generally understood in moral and political philosophy. These norms do not immediately follow from the hypothetical contract as described in the theory (Wempe 2005). In fact, Donaldson and Dunfee do not suggest that substantive hypernorms are instituted by agreement. The authors offer a guide as to how to recognize them; but their authority is independent of consent.

Substantive hypernorms are presented by Donaldson and Dunfee as “convergent” principles that the macro contractors would recognize as belonging to a minimum universal morality. So it seems that a minimum universal morality is simply assumed, as if emerging from a “global” extant social contract. But if this is so, a doubt arises about the necessity of the hypothetical social-contract argument. Why couldn’t these “convergent principles” be used as the only legitimacy check for community-based norms? What does the hypothetical contract add to the minimum universal morality on which all economic agents converge anyway? These questions elicit many of the critical responses to ISCT.

No other notion is as controversial as hypernorms. The notion of moral free space perhaps requires some clarification: it refers to a) the collective freedom to establish ethical norms by consent, and to b) the individual freedom to join economic communities. Moral free space understood as a) amounts, according to Boatright (2000), to a communitarian view of business ethics. Understood as b), it is the opposite, since it implies the liberal view that individuals choose to belong to a certain community (professional, corporate, industry, national). This choice should not be mistaken for a piecemeal acceptance or rejection of each and every norm supported by the community; rather, any such choice would be all-encompassing. Based on this encompassing will, the individual can be held accountable for her individual failures to comply with tacitly accepted standards. In sum, the notion of moral free space purports to explain why business ethics norms can legitimately vary, but also why free individuals are actually bound by ethical norms imposing constraints on their actions.

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Application and criticism of Integrative Social Contracts Theory

Donaldson and Dunfee’s ISCT offers a theoretical foundation of business ethics and a relatively clear guide for managerial decision in a wide range of functional areas and cultural contexts. Their ISCT has been applied to the following issues and problems: gender discrimination (Mayer and Cava 1995); differences in moral reasoning and ethical standards across cultures (Bucar et al. 2003; McCarthy and Puffer 2008; Spicer et al. 2004), including bribery (Dunfee et al. 1999: 14–32); distribution of life-saving pharmaceuticals in developing countries (Danis and Sepinwall 2002); downsizing (Van Buren III 2001); and deviant behavior in organizations (Warren 2003).

The impact of the theory is better measured, however, by the number and range of criticisms it has received. The core of the theory was published in 1994, so even the book Ties that Bind (1999) dealt with some early criticism: in explaining substantive hypernorms, Donaldson and Dunfee (1999, Chapter 3) mention—and try to respond to—several critical comments, among them Mayer (1994), Nelson (1996), Rynning (1996) and Taka (1996). An excellent summary of critical reactions to Ties that Bind is Dunfee (2006). Again, most criticism concerns hypernorms.

The method of ISCT has been much scrutinized (Conry 1995; Marens 2007; Velasquez 2000; Frederick 2000). Most critics point in one way or other to what Wempe (2005) defines as “discipline” in the use of the argument. The normative force of the argument of the social contract rests on how normative conclusions are plausibly derived from empirical assumptions about the parties, combined with the collective objective served by the agreement. Critics observe little precision in the definition of the individuals entering the contract or in the passage from their common aim to the conclusion about the content of the contract. Contemporary social contract theories devote great attention to the definition of the original position—it must be realistic despite being completely fictional—because the acceptability of the normative consequences of the theory crucially depends on the acceptability of the premises. However, Donaldson and Dunfee describe the original position in just a couple of passages in a twenty-two page chapter (1999, Chapter 2). Part of the vagueness is due to the use of the two concepts of contract (actual and hypothetical) in one single theory (Velasquez 2000; Boatright 2000). Wempe (2005) concludes that the structure of the original position as defined by Donaldson and Dunfee does not entail their conclusion.

The ISCT is challenged also by scholars defending a “political” approach to business ethics drawing upon Jürgen Habermas’ discourse ethics. Contractarian business ethics is expected to be a “political” theory of business ethics, in part due to the political origin of the social contract argument. However, ISCT remains—the objection goes—too removed from the political dimension of business. In practice, it focuses on managerial decision making; in theory, it is very abstract and speculative, granting no place to actual political struggles within corporations or among corporations and other social institutions. Andreas Scherer and Guido Palazzo (2007) argue that Donaldson and Dunfee design a “mono-logical” theory of fair economic behavior, a theory whose method is no different from the armchair philosophy of the seventeenth century. They propose instead a dialogical approach that would be true to the fact that corporations often include opposing, sometimes conflicting, interests, so that seldom can they be equated with “communities” where consensual norms simply emerge. Gilbert and Behnam (2009) offer a revision of ISCT according to a Habermasian view of ethics and fairness. Note that, in ISCT, micro-norms are supposed to have spontaneously evolved as local practices, while macro-principles are rationally discoverable. Neither is given a deliberative origin. This is in contrast with standard stakeholder theory, which emphasizes the role of stakeholder dialogue. Overlooking the role of deliberation is thus seen both as a theoretical mistake and a practical problem for the theory.

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As noted above, the nature and function of hypernorms is probably the most contested issue in the theory. These norms are theoretically questionable from different points of view. The contractarian objects that they introduce substantive values not directly derived from agreement (Van Oosterhout et al. 2006; Marens 2007); the communitarian, that they introduce universal values over and above local ones (Douglas 2000; Husted 1999). The realist may complain about the indefinite and weak philosophical foundation of these norms (Conry 1995; Boatright 2000; Soule et al. 2009). The relativist may deny their universal character (Douglas 2000). From a deliberative perspective, such norms set aside any universal insights that might be gained from normative discourse (Scherer 2015).

Beyond theoretical worries, they are questionable in practice. Some scholars complain that the proposal for their identification does not yield clear-cut results; for example, Dunfee (2006: 305–308) shows how the problem of identification has plagued attempts to apply hypernorms as management guides in many fields. In fact, some authors sympathetic to the general aim of ISCT have proposed re-defining the theory without hypernorms (Husted 1999; Soule et al. 2009).

These references are not meant to be exhaustive or representative of all the criticism towards ISCT. They intend to show that ISCT sets the stage for a deep discussion about CBE as a method for business ethics. Even if the project of integrating actual and hypothetical contracts remains highly problematic, Donaldson and Dunfee’s work is an ineludible reference for any social contract approach to business and corporate ethics.

Other social contract theories in business ethics

In this section a brief characterization of other relevant CBE theories will be offered. De Graaf’s distinction (2006) between heuristic and constitutive social contract will be used to group these theories. To appreciate the differences, it is essential to focus on the theoretical aims of each.

Heuristic CBE

For heuristic CBE, the language of the social contract simply helps to make sense of a complex normative reality in a way that fits our common notions of mutuality, reciprocity, and fairness. But this usage implies no commitment to particular views about the ultimate source of value.

For example, Freeman’s allusion to the social contract is explicitly framed in a pragmatist approach to value (Freeman and Evan 1990). His declared objective is to overcome the separation thesis—the idea that a business decision can be fully justified from an economic point of view while being unethical (and vice-versa). This objective requires re-describing the corporation in terms that avoid distinguishing between an economic and an ethical component of decisions. Portraying the corporation as the result of a social contract conveys the idea that the network of stakeholders constitutes a moral community, rather than a bunch of economic agents interacting for profit. The rhetoric of the social contract facilitates understanding the value-creation activity of corporations as part of an acceptable way of life, while relinquishing the possibility of “finding some moral bedrock” for business, “for there are no foundations for either business or ethics” (Freeman 1994: 418).

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Not far from this pragmatist view, Lütge’s defense of “order ethics” can be cited as another form of a purely heuristic use of (some elements of) the social contract. The aim here is to define “corporate responsibility” as a branch of the larger set of rules that secure social order. Lütge’s theory claims to be contractarian in the sense that it adopts the view of society as a cooperative venture for mutual benefit, and shares the analysis of social dilemmas based on games and individual self-interested behavior. Lütge adopts Bruce Ackerman’s (1980) version of the original contract as an agreement to help design a framework of rules that transforms Prisoner’s Dilemma-like situations into co-ordination games where individual self-interest is aligned with social benefit. Order ethics is guided by the question of how to increase mutual benefit in the long run. The best solution from a contractarian point of view is for corporations to commit themselves to public policies and rules carefully designed to include incentives (punishment and reward) that make compliance the rational move for each participant, therefore securing stability and predictability (Lütge 2012a).

Cited by Donaldson and Dunfee as one of the forerunners of CBE, Michael C. Keeley (1988) seeks to provide a theory of organizations that is more empirically grounded than rival approaches that utilize organic or mechanistic models. Keeley advances a view of organizations as a series of contracts among people. These empirical contracts are often formal and explicit, but the implicit variety also exists. To view organizations as social contracts, Keeley suggests, offers a better metaphor and a better tool to deal with normative questions than rival accounts. Even if his theory points to empirical contracts as sources of mutual obligations, the device of the hypothetical contract is used heuristically to explain the network of individual rights that define an organization’s structure and legitimize individual claims. As Keeley states, “the key theoretical question here is: What concrete rights would self-interested participants agree to support if they were in a position to freely negotiate a set of rules for mutual benefit?” (Keeley 1988: 19).

Constitutive CBE

The work of Robert Phillips represents an application of the contract argument to more concrete questions. In seeking to provide an ethical foundation for stakeholder management (and one that avoids Freeman’s pragmatism), Phillips combines tacit consent with Rawls’s principle of fairness (Phillips 2003: 86). Yet, contra Rawls, he applies this notion not to the basic structure of society but to other social institutions such as business firms. Phillips contends that if one is engaged in a cooperative scheme and accepts its benefits, then one thereby consents to the obligations that the scheme may impose. The functioning of tacit consent as obligation-generating device is parallel to Donaldson and Dunfee’s view of micro-social contracts (Phillips 2003: 100–106).

Arguably the most sophisticated attempt to bring the formal argument of the social contract to bear on corporate responsibilities, the work of Lorenzo Sacconi (2000, 2011a, 2011b) delineates a detailed contractarian explanation of the responsibilities of corporations based on a hypothetical contract. If we imagine an original contract among all constituents of a firm, then that agreement would specify how the firm should be governed and who is to profit from the firm’s operation. In particular, the constitutional contract of the firm would specify the status, scope, and requirements of formal “Corporate Social Responsibility (CSR)” policies. As explained above, Sacconi’s theory aims also at explaining compliant behavior.

In his 2011 version, Sacconi’s argument adopts an explicit Rawlsian form. The status quo is represented by production without firms (via a nexus of one-to-one contracts); such a state is inefficient due to transactions costs. The device of the hypothetical contract behind a veil of ignorance is then applied to this status quo. What governance structure would be chosen by all constituents of the firm, if they had to agree on a “constitution” for the firm, without knowledge of their position in the resulting governance structure? The veil of ignorance obscures which party will end up having some pre-contractual asset (capital, knowledge, education, ability, etc.) to be invested.

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Sacconi treats this problem as a bargaining game. If the players of this game are rational, then a solution can be found. The bargaining game was defined by Nash as the problem of finding a distribution of utility that maximizes the product of utilities of the bargaining parties, subject to the restriction that no party gets a utility lower than the status quo (Nash 1950). The original position guarantees impartiality because each bargainer must adopt the position of anyone (since by stipulation she can end up being anyone), therefore the bargaining solution would be fair.

Fairness is not only the result of an impartial original position but a rational requirement to secure compliance in the ex post situation. A basically egalitarian solution to the bargaining problem faced by the original contractors will elicit a rational preference for compliance by facilitating a reciprocal expectation of compliance that can activate, in turn, the pro-social attitudes of economic agents.

Concluding remarks: criticism and new directions

Contractarian business ethics is in part made up by the dialogue among its proponents. Donaldson’s first theoretical foray in 1982 was criticized as inconsequential and incomplete; Keeley’s social contract theory of organizations has been accused of smuggling a theory of rights (Wempe 2005). Dunfee thought Donaldson’s Rawlsian approach too removed from the real workings of business ethics. And their joint publications immediately encountered suspicion and questions.

Virtually all contractarian theories of business ethics have been challenged by proponents of alternative CBE theories. The following two samples illustrate this. George W. Watson et al. (1999) took up one of the themes Donaldson and Dunfee proposed for future research: the empirical validation of the theoretical assumptions of ISCT. Watson et al. conducted a survey to check the perceived fairness in several downsizing scenarios. Their conclusion is that any perception of fairness is influenced more heavily by the predominant individualistic or communitarian ideology of the subjects than by any other variable. This result can be interpreted as questioning the social consensus at the micro level that the theory of extant social contracts seems to assume. Individual factors influence moral judgment more than social identities.

De Graaf (2006) sets forth a representative philosophical criticism. Drawing upon Wempe’s (2005) complaint that CBE had not been “domain-specific” enough, De Graaf contends that CBE has simply used some concepts developed in the social contract tradition without any adaptation to the domain of business ethics and without any serious discussion of their meta-ethical or anthropological assumptions. This causes conceptual weakness in CBE. De Graaf points out, for example, that the concept of autonomy used in all-encompassing social contract theories is not even required for a social contract explanation of business norms; a clear idea of individual responsibility would be enough.

Apart from this internal dialogue, CBE has received a constant downpour of criticism from opponents to the contract hypothesis and the stakeholder view of the corporation. In his robust criticisms of the stakeholder perspective, Samuel Mansell (2013) argues for a shareholder view of corporations. He dismisses as unnecessary the elaboration of hypothetical mental experiments about the firm and contends that a genuine moral basis for the market is at odds with the assumptions of social contract theory.

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More recently, Abraham Singer (2015) challenges the Rawlsian brand of CBE (Bishop 2008; Neiman 2013, for example). Rawls maintained that the corporation was a private association and not a part of the basic structure. Corporations would be subject to the principles of justice as these are applied via constitutional or legal provisions; however, there is no basis in Rawls’ theory for asserting that either the form of corporate governance, or the very ends of the corporation, can be chosen by its members with no further limits. Since so many theories of CBE assume a Rawlsian framework, it must be clarified to what extent that framework is compatible with the ethics of the firm or corporation.

Apart from these types of criticisms, one may well consider whether the original theories of CBE have provided new avenues of exploration. After all, Donaldson and Dunfee suggested that contractarian theories would engender “promising research directions for CBE” (1994: 178). Although it is not clear that these hopes have been fulfilled, it would still be pertinent to explore, for example, the nature of consent in business ethics, our understanding of the empirical foundations of ethical behavior in organizations, and the link between contractarian thought and stakeholder management.

Two issues that are receiving fresh attention are “contractarian assumptions and moral psychology,” and “managerial utility and contractarian business ethics.” These topics both raise questions as to how the norms derived from the social contract are (or are not) compatible with moral psychology. These questions have received further impetus from advances in behavioral business ethics and new experimental methods in ethics. Some connections between an ex ante agreement and actual ex post behavior can be tested in the laboratory, as Marco Faillo et al. (2015) show. The experimental program in CBE is one of the most promising and distinctive contributions in the field (for an overview, see Francés-Gómez et al. 2015).

Recommended reading

Thomas Donaldson and Thomas Dunfee’s Ties that Bind. A Social Contracts Approach to Business Ethics (1999) is required reading. The Précis that the authors wrote also comes in handy: “Précis for: Ties that Bind” (2000). In his essay, “In Defense of a Self-disciplined, Domain-specific Social Contract Theory of Business Ethics,” (2005), Ben Wempe offers a nice tool to navigate the tradition and provides a useful comparison with classic theories. A critical, philosophically informed, and aptly illustrative study is Samuel Mansell’s Capitalism, Corporations and the Social Contract (2013). For a recent critical exploration of the possible uses and interpretations of the social contract model in business see Nien-he Hsieh, “The Social Contract Model of Corporate Purpose and Responsibility” (2015).

For further reading in this volume on modern theories of ethics, including Hobbes’ social contract, see Chapter 2 Theorists and philosophers on business ethics. On contractualism as a species of non-consequentialism, see Chapter 5 Consequentialism and non-consequentialism. On the use of social contract theories in cross-cultural contexts, see Chapter 32 The globalization of business ethics.

Note

*    This work was made possible thanks to funding from the Spanish Ministry of Economy (DGICYT) through the research project BENEB FFI2011-29005 and BENEB2 FFI2014-56391-P. I am grateful to César González Cantón for references about ISCT; and to Eugene Heath and Alexei Marcoux for their help and suggestions.

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