Academic journal article Michigan Law Review

The Corporation's Place in Society

Academic journal article Michigan Law Review

The Corporation's Place in Society

Article excerpt


Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics. By Joseph Heath. New York: Oxford University Press. 2014. Pp. ix, 372. $65.

The social responsibility of business is to increase its profits.

-Milton Friedman1

Economic justice is concerned with the fairness with which benefits and burdens . . . are distributed . . . among organizational stakeholders.

-Newman S. Peery, Jr.2

The vast majority of economic activity is now organized through corporations. The public corporation is usurping the state's role as the most important institution of wealthy capitalist societies. Across the developed world, there is increasing convergence on the shareholder-owned corporation as the primary vehicle for creating wealth.3 Yet nothing like this degree of convergence has occurred in answering the fundamental questions of corporate capitalism: What role do corporations serve? What is the goal of corporate law? What should corporate managers do? Discussion of these questions is as old as the institutions involved.

Contemporary reflection on these questions takes the form of two starkly different and estranged orthodoxies.4 Both are now decades old, but neither shows any sign of either subsiding or emerging victorious. In corporate finance, economics, and most of corporate law, the orthodoxy is that a corporation should aim exclusively to maximize shareholder value within the constraints established by law ("shareholder theory").5 In business ethics, the leading view is that corporate managers should balance the interests of all the constituencies affected by a firm's actions, including employees, suppliers, consumers, owners, and the broader society ("stakeholder theory").6

Joseph Heath's new book, Morality, Competition, and the Firm,7 revisits these questions. Heath criticizes the two standard views and develops an alternative, which he calls a "market failures" approach (p. 1). Heath endorses much of the shareholder view, but offers a powerful critique of its application. In essence, he suggests that it is managers' ethical responsibility to pursue shareholder wealth maximization if, and only if, doing so is conducive to aggregate social efficiency.8 Often this will be the case, but under conditions of market failure-when the allocation of goods and services in a market is inefficient for some reason-it is possible to increase shareholder wealth without contributing to social efficiency. Heath's approach forbids corporate managers from pursuing shareholders' interests when doing so exploits a market failure. This simple ideal of corporate managers as custodians of social efficiency turns out to have dramatic implications for business ethics.

The scholarship addressing what corporate managers should aim to achieve is extensive.9 What sets Heath's book apart is the remarkable breadth of legal, economic, and political analyses that he brings to bear and the brilliance with which he synthesizes them.10 This book is one of the new century's most important contributions to addressing capitalism's fundamental questions.

This Review begins with the foundations of the market failures approach and a critique of the shareholder and stakeholder views. Heath's critical project is largely successful and surely one of the most important contributions of the book. I then turn to the viability of the market failures approach. While sympathetic to the insights driving it, I ultimately find the market failures view to be far more exacting than Heath imagines it to be. Heath's book aspires to offer both compelling and realistic ethics for corporate managers, and it is in his second aspiration that I think he fails. This is, in itself, rather striking. Heath explicitly takes his vision of corporate purpose and managerial ethics to consist solely of the pursuit of efficiency, which he calls a kind of "implicit morality of the market."11 Yet even the naked goal of social efficiency imposes a set of moral requirements so demanding as to be plainly utopian. …

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