A Social Contract Account for CSR as Extended Model of Corporate Governance (Part I): Rational Bargaining and Justification
Trento University Economics Discussion Paper No. 10
43 Pages Posted: 1 Jun 2005
Date Written: December 2004
This paper is the first part of a two parts essay aimed at giving a contractarian foundation to the concept of Corporate Social Responsibility (CSR) meant as an extended model of corporate governance of the firm. I fist present the heuristics of the scientific program meant to theorizing over an institution like a system of corporate governance, which is partitioned in two domains, the justification domain and the compliance domain. Bargaining theory, reputation game and reciprocity theories, as distinct pieces of game theory, are the main theoretical tools employed in developing the answer to the relevant questions in the two domains respectively. The first part focuses over justification according to the contractarian point of view. At start, a definition of CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firm's stakeholders, is given. Then, by setting the basic context of incompleteness of contracts and abuse of authority, I analyze how the extended view of corporate governance directly arises form within the criticism of contemporary neo-institutional economic theory of the firm. Hence, from an application of the theory of bargaining games, the structure of a multi-stakeholder firm based on the constitutional contract theory is deduced, which satisfies the basic requirements of a justification in the contractarian approach. This is a sequential model of constitutional choice, where at the first step a constitution is chosen and then a post-constitutional coalition game is played. Both the games are solved in terms of the proper cooperative bargaining and coalition game solution concept, and results are interpreted not only according to the perspective of the theory of rational bargaining, but also as an impartial solution, starting form a fair status quo and corresponding to reasonable intuitions on distributive justice. On these basis the inquiry for a prescriptive theory of governance and strategic management - able to overcome the criticism raised against the lack of determination and unicity of a multi-stakeholder model of corporate governance and strategy - is answered, so that I am able to define an objective function for the firm consistent with the idea of CSR as a model of governance. At last, the paper tells the contractarian story, which can be taken as a potential explanation of the firm, of how the multi-fiduciary corporation may emerge from the first and the second social contract, as a firm endowed with the typical structure of control, but constrained by CSR obligations that those who in the firm hold a position of authority owe to all the non controlling stakeholders.
Keywords: Corporate Social Responsibly, Fiduciary duties, Stakeholder theory, Theory of the firm, Incompleteness of contracts, Social contract, Bargaining games, Nash bargaining solution, Distributive Justice, Impartiality
JEL Classification: M14, D23, C78, D63, L21
Suggested Citation: Suggested Citation