Discussions

F O R M A L ORGANIZATIONS, E C O N O M I C F R E E D O M AND M O R A L AGENCY

PATRICIA H O G U E W E R H A N E

Loyola Universityof Chicago

Contemporary societal expectations place an onus of moral responsibility on the activities of economic institutions, specifically on the activities of modern business corporations. However the economist Milton Friedman claims that: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. 1 In this paper I shall make three arguments. First, I shall argue that while society tends to hold corporations morally responsible, and while one might agree that corporations should be morally accountable, corporations, as formal institutions, are so structured that such accountability is philosophically inappropriate. I shall criticize certain recent suggestions offered to make sense out of corporate moral responsibility because, these suggestions either confuse corporations with other kinds of institutions, or they tend to confuse th~ concept of social responsibility with moral accountability. Second, I shall claim that my conclusion that corporations are not structured as moral agents does not support Friedman's argument that in a free society the only responsibility of business is to its stockholders. This is because social responsibility and moral accountability are not interchangeable concepts, and because profit maximization and social responsibility are not contradictory corporate functions. I shall conclude the paper by arguing that Friedman's notion of a free society involves the notion of moral accountability, and that corporate moral agency is a condition for the proper functioning of a private free enterprise system. Thus if economic freedom and autonomy are important, corporations might wish to examine what the notion of institutional moral agency entails. A number of contemporary philosophers have attempted to justify the argument that it is appropriate to hold corporations morally responsible. In a recent paper entitled "The Moral Responsibility of Corporations ''2 David Ozar tries to establish the claim that corporations are single individuals or are sometimes treated as individuals, and thus, like individual human beings, J. Value Inquiry 14 (1980) 43-50. All rights reserved. Copyright 9 1980 Martinus Nijhoff Publishers by, The Hague / Boston / London.

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corporations are morally liable. To this end Ozar compares corporations to other kinds of institutions such as clubs and nations. Ozar points out that corporations, like clubs and nations, operate like single individual entities. Corporations have legal status as individuals, and each of these kinds of institutions has rules or by-laws governing their actions considered as individuals. The rule model, Ozar argues, implies agency. And because we hold human agents morally responsible, and because we hold clubs and nations morally responsible, so too we can hold other rule-governed institutions such as corporations morally responsible. The issue Ozar's paper raises is not whether we treat corporations as individuals nor whether corporations adopt rule-governed behavior. Rather the issue centers on whether all rule-governed behavior implies moral agency so that it makes sense to say that corporations, like clubs and nations operate as morally responsible individuals. There are important differences between corporations and clubs and nations. These differences include structural differences in the roles of institutional rules and goals, differences in the roles of institutional rules and goals, differences in memberships, and differences in the relationships between the institution and its members. These differences, I shall argue, preclude making the analogy that corporations, like clubs and nations, are moral individuals. The relationship of a club or a nation to its members or citizens is different from the relationship of a corporation to its employees. The well-being of individuals, or groups of individuals, constitutes an essential part of the ends or goals for which a club or nation is constituted. Clubs and nations are, by and large, structured for their members, and many, if not all, of the rules, bylaws, constitutions, etc., of these institutions apply to their members or to the rights and conduct of their members. The modern business corporation however, is an economic institution structured primarily for the achievement of material ends external to the corporation. Corporate goals include customer satisfaction, technological advancement, market penetration, profit maximization, etc. Corporate rules and guidelines are aimed at the efficient maximization of these goals. "Following a rule" in corporate activities usually involves maximizing corporate goal achievement as efficiently and productively as possible. Thus the corporation is a formal organization constituted to achieve impersonal ends external to the organization. In his paper, "Morality and the Ideal of Rationality in Formal Organizations ''3 John Ladd argues that corporations are formal organizations in another sense. Corporate employees are impersonal members of corporations. Employees are one of the means through which a corporation is a success or failure, but not an end for which the corporation operates. In corporations, clubs and nations, many of the activities of its respective members are regulated by corporate policies, by-laws and constitutions. But while rules and goals of clubs and nations are structurally connected to their members or citizens, corporate aims and company guidelines are not so related to company employees. In a corporation rules function more like operating instructions than moral prescriptions, since in corporate activities disobeying a rule means not performing one's job.

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In modern corporations employee rights are defined by institutions external to the corporation, e.g., unions, government agencies, and laws. But seldom are employee rights embodied in the structure of the corporation as an institutional part of its operations. In talking about actions of clubs and nations, however, the rights or absence of rights, of its members or citizens is an important issue. Corporate employee rights are an issue only insofar as these contribute to corporate success. As a club member or a citizen I have, at least in principle, a right to protest rules, goals or actions of my club or country when I think they are injust or unfit. In a corporation employees have no such rights. Such protests would be considered inappropriate, the employee would be accused of disrupting economic activities, and the employee likely would be fired. One might suggest that stockholders, who are the owners of corporations, have a relationship to a corporation somewhat analogous to the relationship of a club member to a club, since one of the aims of a corporation is to maximize earnings for shareholders. However this is not the case. Because most stockholders are not corporate employees nor sit on boards of directors, most stockholders have little or no responsibility for what happens in a corporation. They are not involved in establishing corporate aims nor in realizing (or criticizing) these aims, and there is some question whether stockholders have any decision-making rights. In reality stockholders are an abstract group of owners who happen to hold stock on the particular day when earnings are paid out. Clubs and nations are so structured, then, that the club or nation is responsible to each of its members, and its members have certain rights defined by the club. Moreover members of a club or nation are morally responsible or held responsible for the activities of that club or nation. For example, we tend to hold the German nation as a whole responsible for Nazi activities during World War II, even though many Germans were not Nazis. However it would be illogical to hold assembly-line workers at General Electric responsible for General Electric's alleged price-fixing activities in the 1960's. Thus one might ascribe moral responsibility to a club or nation, and therefore to its members but such ascription of moral agency to a corporation is questionable in light of the largely abstract and impersonal relationships of the corporation both to its employees and to its stockholders. Thus, as Ladd argues in his paper, corporations are structured very much like machines. Corporate rules and operating procedures, like the design and structure of a machine, are set up to achieve external economic ends rather than designed in relation to, or as a consequence of member employees. 4 Each employee in a corporation, like each part in a machine, plays an important role in achieving corporate ends, but any weak or dissident employee, like any malfunctioning part, could be, and should be, replaced in order to operate at maximum corporate efficiency. Therefore, while corporate activities are rulegoverned, these rules, as impersonal operating procedures, preclude rather than imply moral agency. And just as it is silly to ascribe moral responsibilities to machines, so too, the organization, structure and goals of a corpo-

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ration suggest that it does not make sense to ascribe to it moral responsibilities. The differences between corporations, clubs, and nations accounts for some interesting phenomena. Until recently we have not treated corporations as having moral responsibilities. In this decade government legislation of corporate morality through EEOC, OSHA, SEC, FTC, etc., is a result, in part of past nonrecognition by corporations and by society of the social and ethical implications of what we all understood as primarily economic activities, a nonrecognition partly due to the way in which corporations are structured. Corporations themselves as institutions have not understood what it meant to be morally responsible. Corporations were not self-conscious of themselves as moral individuals. And they were not self-conscious because as economic institutions moral rules and moral actions do not count as formal corporate actions. Thus a corporation might argue that it cannot be criticized for being immoral or for not developing rules appropriate to morally responsible actions, because these kinds of rules are not appropriate to the organizational structure, the roles of corporate employees, and the ends of'corporate institutions. The notion of corporate responsibility might be explained in terms of social responsibility. It is often claimed that corporations have certain kinds of responsibilities to the society in which they operate. It is then claimed that we can ascribe such responsibilities to corporations despite the way in which corporations are structured as formal institutions, and that such responsibility can be defined as "moral accountability". To make this point Kenneth Goodpaster, in his paper "Morality and Organizations",s suggests that the comparison of corporations to machines is too static and too narrow. Corporations operate more like organisms than machines, because corporations, like other organisms interact with society through various feedback mechanisms. Just as the environment and societal expectations trigger certain kinds of responses in other organisms, so too corporations often act or react according to the kinds of feedback they receive from society. If this model is descriptive of corporations, Goodpaster argues, then it allows a "space" in which a corporation might be expected to adopt moral goals as a response to community criticism or esteem. The idea that formal organizations might adopt moral goals is further developed by Thomas Donaldson in his paper, "Moral Change and the Corporation. ''6 Donaldson points out that even in the pursuit of economic ends corporations o~en react to moral restraints imposed on them by society. Moreover, Donaldson argues, it is not impossible, and indeed it is highly plausible to suggest that formal institutions such as corporations could adopt moral goals. These goals could be institutionalized within the structure of the corporation such that they became ends for which a corporation might operate. For example, a corporation could adopt a policy of hiring qualified minorities without giving up its goal of economic gains. Both Goodpaster and Donaldson have enhanced the concept of a corporation and shown that it is not impossible for a formal organization to adopt

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goals which we would ordinarily label as "moral". I would suggest, however, that they have not succeeded in demonstrating that corporations, like clubs, nations, and human individuals are moral agents. For while a corporation might adopt moral goals in response to societal feedback or might institutionalize morally appropriate behavior as a corporate aim so that such a corporation could be labeled socially responsible, this is different from moral agency, and moral agency cannot be ascribed to formal institutions. To argue this point, let us consider a mythical example. One might imagine a corporation which was operated solely by robots and computers. Such an organization, let us call it Robotron, would have a charter and legal status. It would operate like other corporations. It would own property, manufacture products, conduct marketing, correspond with other corporations and with customers, replace obsolete equipment, develop new product lines, write proxy statements, answer SEC inquiries, etc. Robotron would have stockholders and pay out dividends. Only a visitor to corporate "headquarters" would learn that Robotron had no human employees. And such a corporation could be programed to respond to feedback from societal expectations such as requests for anti-pollution devices, safer products, etc. In fact one could imagine that Robotron was an organization such as CARE which institutionalizes valued moral goals as its corporate aims. This corporation, Robotron, meets all the Donaldson-Goodpaster requirements. It lives up to societal expectations, it conforms to requests of government agencies, it institutionalizes moral goals in its operations, and from an economic point of view it operates efficiently and profitably. But Robotron, I would argue, is not morally responsible. It is not morally responsible because it is not a moral agent. And its lack of moral agency is not merely a result of its lack of human employees. Even if Robotron did have human employees, the relation between Robotron and its computers would be much the same as the relation between Robotron and its human employees, because the structure of Robotron as a formal organization would remain unaltered. Decision making by non-human employees would consist of institutional decisions, and non-efficient employees, like obsolete computers, would be replaced. And the role of the human or computer employee in achieving corporate moral goals, such as those of CARE, would be the same as inachieving the production of light bulbs or airplane engines. This last point needs elaboration. What I am suggesting is that the qualitative value of institutional goals does not necessarily determine whether or not the institution is a moral agent. CARE has highly commendable goals, and most of its employees are not robots. But CARE is a formal organization. The relationships of the institution, the structure of the institution and institutional goals to its employees are impersonal relationships. This is because the operators of any corporation, whether they are human or robots, are themselves merely operators. They are part of the institution only to achieve ends which are not their own. Their choices are important only when they affect the success of achieving corporate goals. And corporations, such as CARE, exist not for their members but for the successful pursuit of ends which have little or no relation to the employees who realize them.

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Therefore one may assign corporations and other formal organizations moral goals, and these institutions may institute moral goals themselves into their corporate structure as part of their operating procedures. Such corporations are socially responsible institutions and society should commend these actions. However, even in these cases I would suggest that one cannot make the further claim that these corporations are morally responsible. Social responsibility does not necessarily imply moral agency. Corporations are not structured such that they operate as moral agents. The relationship of corporate members (employees, robots and stockholders) to corporate rules and goals and the absence of a reciprocal relationship between the corporation and its employees precludes such agency. It is beyond the scope of this paper to explore what corporate moral agency might entail. I would suggest, however, that if it is the case that a corporation such as Robotron can operate as a socially responsible organization it is obvious that merely to alter the goals of a formal organization does not, in itself, alter the moralness of the institution as an agent. Achieving corporate moral agency would involve, in brief, internal alterations of corporate structure; that is, there would have to be a radical restructuring of the relationship of the corporation, both to its goals and even more importantly to its member employees. And the role of the individual in the organization would have to be such that the Robotron analogy will not hold. Corporations have been operating as highly successful economic institutions for some years. The fact that they are not structured as morally responsible agents might not be offensive to them. Such institutions never made that claim nor thought that moral agency was necessary for economic success. Why, then, might the question of moral agency be important to a business corporation? In what follows I shall develop the claim that moral agency is necessary for economic freedom and autonomy. Applying this to formal institutions, if corporations wish to operate freely without social or governmental constraints and if this form of operation actually enhances the economic life of the community as some economists suggest, then corporations might wish to take the idea of moral agency seriously. Milton Friedman argues that economic freedom is a necessary condition for political freedom. By economic freedom Friedman has in mind a society consisting of autoiaomous privately owned economic enterprises each pursuing its own ends and freely competing with each other in the marketplace. In this society government would have little or no role in economic activities, and political power and economic success would be separate. In such a society, Friedman suggests, economic freedom, and thus political freedom prevail, z It is with this concept of economic freedom in mind that prompts Friedman to claim that profit maximization and social responsibility are incompatible corporate goals. Friedman's picture of ideal free enterprise is incomplete on two grounds. First, as I suggested earlier, social responsibility is not incompatible with the operations of formal organizations. Thus a corporation might be socially responsible, it might adopt moral goals as part of its corporate aims, and be highly profitable as well. Second, Friedman does

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not consider corporate moral responsibility an issue at all, because, I think, Friedman would agree that moral agency does not apply to formal economic institutions. However a difficulty arises because there is an inconsistency in Friedman's concept of a corporation as a Jree autonomous institution to whom the notion of moral agency does not apply. This inconsistency is best illustrated by re-examining the computer corporation, Robotron. Suppose Robotron began manufacturing toxic substances injurious to the health of anyone who came in contact with the substances. Societal mechanisms would interfere with Robotron's program and alter its manufacturing techniques to prohibit further manufacture of these toxic substances. No one would accuse Robotron of moral irresponsibility; it just happened to manufacture socially unacceptable substances. Nor would we accuse society of interfering with the rights and freedoms of Robotron since, as a formal organization made up of nonhumans, Robotron has no rights or freedoms. Any formal organization which operates impersonally is, in principle, in the same position as Robotron. Because it neither understands the concept of moral responsibility nor acts as a moral agent, such an institution cannot expect to be treated as a free autonomous agent. And society should feel no moral compunction in enforcing its demands on such an institution. It would appear, then, that if the concept of economic freedom makes sense, and if as Friedman suggests, such freedom is necessary for political freedom, the notion of moral agency as applied to economic institutions is very important. Corporations cannot expect to operate freely and nonmorally. Freedom and moral agency go together, and it is inconsistent to demand one without accepting the consequences of the other. I am not arguing that all corporations should restructure themselves as moral agents. N o r am I agreeing (or disagreeing ) with Friedman's claim that economic freedom is a condition for political freedom. But I am pointing out that freedom and autonomy imply moral agency, and moral agency does not apply to corporations as formal organizations. Therefore corporations cannot expect to be treated as free autonomous enterprises. Thus if economic freedom is of value, and if corporations wish to operate without societal constraints, then they need to examine what might be involved in reconstituting themselves as morally accountable institutions.

NOTES 1. Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago ress, 1962), p. 133. 2. David Ozar, "The Moral Responsibilityof Corporations," in Ethical Issues in Business: A PhilosophicalApproaeh, ed. Thomas Donaldson and Patricia H. Werhane (EngtewoodCliffs, N.J.: Prentice-Hall, Inc., 1979. 3. John Ladd, "Morality and the Ideal of Rationality in Formal Organizations," Monist, 54 (1970), pp. 488-516. 4. Ladd, p. 400.

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5. K e n n e t h G o o d p a s t e r , " M o r a l i t y a n d O r g a n i z a t i o n s , " p a p e r o r i g i n a l l y presented at the Pacific Division Meetings, A m e r i c a n P h i l o s o p h i c a l Association, 1978; D o n a l d s o n a n d Werhane, 1979. 6. T h o m a s D o n a l d s o n , " M o r a l C h a n g e a n d the C o r p o r a t i o n , " Proceedings of the Bentley College Second National Conference on Business Ethics, 1979. 7. F r i e d m a n , pp. 1-6.

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