A Rawlsian View of CSR and the Game Theory of its Implementation (Part I): The Multistakeholder Model of Corporate Governance
EconomEtica Working Paper No. 22
40 Pages Posted: 6 Mar 2011
Date Written: August 1, 2010
This is the first part of a comprehensive essay on the Rawlsian view of corporate social responsibility (in short CSR). CSR is defined as a multi-stakeholder model of corporate governance and objective function based on the extension of fiduciary duties toward all the firm’s stakeholders. A rationale for this idea is given within the perspective of new-institutional economic theory in terms of transaction costs efficiency. From this perspective, abuse of authority in regard to the non-controlling stakeholders emerges as the main unsolved problem. Intuitively, a Rawlsian principle of redress emerges as the natural answer to the legitimization problem of ownership and control rights allocations when, in order to provide incentive to one party (incentive to undertake important specific investments), they give it a disproportionate advantage over other non-controlling stakeholders.
In accordance with the prevailing opinion about its voluntariness, CSR is viewed here as a norm that companies may undertake by autonomous self-regulation in terms of the explicit adoption of expressed standards. This is to be understood as an institution in Aoki’s sense of the term: i.e. roughly put, as a rule in the behavior of a group of players which is maintained through the repeated plays of a given game, thanks to a system of mutually consistent beliefs that induces them to act again and again according to the same rule. With respect to Aoki’s definition of institution, however, proper understanding of an institution requires the addition of an explicitly expressed norm, including prescriptive principles and normative standards of behavior, which is to be accounted for in terms of the firm’s stakeholders’ social contract.
The account of the social contract adopted here is Rawlsian. An impartial agreement is reached in an hypothetical original position by putting the parties ‘under a veil of ignorance’. In our case, this is a matter of unanimous and impartial agreement among the corporate stakeholders that must be reached under a ‘veil of ignorance’ about the particular stakes that each of them holds (and with respect to any other personal traits). By this agreement, the principle of extended fiduciary duties and fair balance among different stakeholders is established as an explicit constraint on directors, managers, and in general on the party who controls discretionary decisions in the firm - a constraint that must prove to be effective throughout the repeated game between the firm and each of its stakeholders.
This part I of the essay focuses on the first role played by the social contract, namely construing commitments to allow definition of a reputation game such that reputation effects can be attached to compliance with the CSR normative model. First of all, the social contract works as a gap filling device with respect to the holes of incomplete contracts linking stakeholders (or the most essential of them) with the firm. In a context of incompleteness of contracts and unforeseen contingencies, the repeated reputation game involving the firm (or those who control it) and each stakeholder would be badly specified because contingent strategies and commitment would be undefined with respect to unforeseen contingencies. Then the intention to accumulate reputation pursuant a strategy of stakeholders’ fair treatment would be frustrated. Thus, at the outset of the stakeholders/firm interaction, a social contract must be established on a set of general and abstract principles of fair treatment, and precautionary (non contingent) standards of behavior, which can be adapted to unforeseen contingencies: that is to say capable of defining commitments neither meaningless nor void if unforeseen events occur. The ex ante social contract on a CSR norm is what enables completion of the game form of the reputation game involving the firm and its stakeholders through definition of the firm’s types that carry out strategies with expected behavior in whatever state, even if unforeseen.
Keywords: Social Responsibility, Social Contract, Institutions, Reputation Games
JEL Classification: C70, D23, D63, G 30, L22, M14, K00
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