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A New Model of Business: Dual-Investor Theory

Published online by Cambridge University Press:  23 January 2015

Eugene Schlossberger
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Abstract:

The paper suggests replacing the shareholder/stakeholder distinction with a “Dual-Investor” model of business: stockowners provide the specific capital for business ventures, while society provides the “opportunity capital.” Thus society is an investor in every business venture. Dual-Investor theory provides a response (based purely on the ethics of investment) to Milton Friedman’s arguments that executives should maximize profit by any legal means, avoids recent criticisms by Kenneth Goodpaster and Thomas McMahon, and suggests that the dichotomy between private and public ownership overlooks several important alternatives. Some consequences of the theory are detailed and a sketch of a theory of property, based on Dual-Investor theory, is appended.

Type
Articles
Information
Business Ethics Quarterly , Volume 4 , Issue 4 , October 1994 , pp. 459 - 474
Copyright
Copyright © Society for Business Ethics 1994

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References

Notes

1 Irving Kristol, for example, argues (in “On Corporate Capitalism in America,” The Public Interest 41, Fall 1975) that corporations are no longer private property, but have become “‘quasi-public’ institution [s]” (p. 138). Ralph Nader claims that because corporations are created for the benefit of the public and granted special powers by the state, they are fundamentally creatures of the state (“The Case for Federal Chartering,” in Ralph Nader and Mark Green, eds., Corporate Power in America (New York: Grossman, 1973), pp. 81–84). See Miller, Fred D. Jr. and Ahrens, John, “The Social Responsibility of Corporations,” in Tibor Machan, ed., Commerce and Morality (Totowa, NJ: Rowman and Littlefield, 1988), pp. 140–60, for a discussion of these arguments.

2 For example, the Dual-Investor theory’s mandate that executives make a profit by serving society is not radically different in practice from Douglas Den Uyl’s suggestion in The New Crusaders (Bowling Green, Ohio: The Social Philosophy and Policy Center, 1984) that, while managers should not recommend policies that would prevent the company from being profitable, they should take into account the needs of non-stockowners when formulating profit-making strategies.

3 As Albert R. Jonsen and Stephen Toulmin point out in The Abuse of Casuistry (Univ. of California: 1988), it is generally easier for individuals to agree upon an outcome than it is for them to agree upon a rationale for that outcome.

4 That is, while smokers would, most would agree, be better off if they could not obtain cigarettes, smokers desire to purchase cigarettes. Does the fiduciary duty of executives to the smoking public entail doing what is best for smokers or does it entail meeting their desires?

5 Freeman, Edward R. and David L. Reed, “Stockholders and Stakeholders: A New Perspective on Corporate Governance,” California Management Review 25, Spring 1983, pp. 88–106. See also Freeman, Edward R., Strategic Management: A Stakeholder Approach (Pitman: 1984).

6 Kavanaugh, John P., “Ethical Issues in Plant Relocation,” in Tom L. Beauchamp and Norman E. Bowie, eds., Ethical Theory and Business (Prentice Hall: 1983, 2nd ed.), pp. 106–15; Garrett, Thomas M., Business Ethics (Prentice Hall: 1966); Dahl, Robert A., “A Prelude to Corporate Reform,” in Robert L. Heilbroner and Paul London, eds., Corporate Social Policy (Addison-Wesley: 1975); Anshen, Melvin, “Changing the Social Contract: A Role for Business,” Columbia Journal of World Business V (Nov.-Dec., 1970).

7 Goodpaster, Kenneth, “Business Ethics and Stakeholder Analysis,” Business Ethics Quarterly 1 (January 1991), pp. 53–73: p. 69.

8 Thus Thomas Donaldson considerably understates the matter when he writes, in Corporations and Morality (Englewood Cliffs, NJ: Prentice Hall, 1982), reprinted in Thomas White, ed., Business Ethics (New York: MacMillan, 1993), pp. 167–87, that “what productive organizations need from society is: 1. recognition as a single agent, especially in the eyes of the law. 2. The authority: (a) to own or use land and natural resources, and (b) to hire employees” (p. 173).

9 Ansoff, Igor, Corporate Strategy: An Analytic Approach to Business Policy for Growth and Expansion (McGraw-Hill: 1965): “while…‘responsibilities’ and ‘objectives’ are not synonymous, they have been made one in a ‘stakeholder theory’ of objectives” (pp. 33–35).

10 Robert Hessen, for example, in his In Defense of the Corporation (Stanford: Hoover Institution Press, 1979), suggests that the special status of corporations may be explained in purely contractual terms. One consequence of Hessen’s “inherence theory” of corporations is that the morality of contract is the heart of business ethics.

11 McMahon, Thomas F., “Models of the Relationship of the Firm to Society,” Journal of Business Ethics 5, June 1986, pp. 181–91.

12 Goodpaster, Kenneth, op. cit.

13 Selekman, Benjamin M., A Moral Philosophy for Management (McGraw-Hill: 1959).

14 Grunebaum, James, Private Ownership (Routledge and Kegan Paul: 1987), p. 176.

15 Nozick, Robert, Anarchy, State and Utopia (Basic Books: 1974).

16 For rich discussions of theories of property rights, see Becker, Lawrence, Property Rights (Routledge and Kegan Paul: 1977); Grunebaum, James, op. cit.; McPherson, C. B., The Political Theory of Possessive Individualism: Hobbes to Locke (Oxford: Clarendon, 1962).

17 Assuming, of course, that the dividends violate no legal or moral norm: paying inappropriate dividends to one set of investors may well violate executives’ fiduciary obligations to other investors. What follows, given Dual-Investor theory, is not that executives should seek maximal profit by (virtually) any legal means, as Friedman suggests, but rather that, contra Friedman, executives must not significantly harm society to produce marginally greater profits for stockowners.

There are, of course, many other objections to Friedman’s arguments. See, for example, Schlossberger, Eugene, The Ethical Engineer (Temple University Press, 1993); Grant, Colin, “Friedman Fallacies,” Journal of Business Ethics 10 (Dec. 1991), pp. 907–14; Mulligan, Thomas, “A Critique of Milton Friedman’s Essay The Social Responsibility of Business Is to Increase Its Profits,’” Journal of Business Ethics 5 (Aug. 1986), pp. 265–69; Goldman, Alan H., The Moral Foundations of Professional Ethics (Rowman and Littlefield: 1980); Birsch, Douglas, “The Failure of Friedman’s Agency Argument” as well as the editors’ “An Analysis of Friedman’s ‘Social Responsibility’ Article” in Joseph R. Desjardins and John J. McCall, eds., Contemporary Issues in Business Ethics (Wadsworth: 1990, 2nd ed.), pp. 28–36 and 12–21, respectively.

18 Some of the argument for this claim may be found in Schlossberger, Eugene, Moral Responsibility and Persons (Temple University Press: 1992). The full argument for this and many other of the claims made in this section will appear in future works.

19 It might be argued that the harm to the community in which the facility is currently located would be offset by the benefits gained by the community to which the facility moves. This argument, however, overlooks the significant disruption costs, both financial and personal, of closing a major facility. When the primary employer in an area closes its facility, many employees, shop-owners, city workers, teachers and so forth are forced to relocate, re-train, etc. Couples who both work in the area must separate, or the spouse whose job is unaffected by the facility’s closing must also find a new job. Even if these individuals find jobs in the new community, they experience significant costs. There are financial and personal costs to disrupting friendships and social relationships, selling a home that may have been in the family for generations, taking one’s children out of school during the school year, learning new skills (such as resume preparation) that may not be useful once the new job is found, etc. A small business owner (such as the owner of a restaurant) must re-build the reputation and clientele for her venture. A teacher may have to forfeit tenure, an attorney may have to learn a new state’s laws and procedures, and a consultant may have to start over in building contacts and networks. Choices made in the old environment may no longer be appropriate for the new location (for example, the four wheel drive pickup without air conditioning purchased in Alaska may be less useful in Atlanta).

20 In such a case, it should be noted, the corporation has some duty to ameliorate the harsh effects of closing, by, for example, seeking a new owner for the plant through creative reuse, providing job placement assistance (which may include teaching interviewing and resume preparation skills, networking, lobbying, and establishing information hotlines), retraining and/or relocation within the corporation, etc. Stroh’s actions after closing its Detroit Breweries provide a fine example of such assistance: see Desjardins, Joseph R. and John J. McCall, Contemporary Issues in Business Ethics (Wadsworth: 2nd ed., 1990), p. 477.