Ethics, Economic Organization and the Social Contract

This chapter introduces a notion of social/ethical norm that integrates its description as a self-sustaining regularity of behavior with the normative meanings of the statements by which a norm is formulated in the moral language. This definition is applied to organizational ethics where the main problem – abuse of authority – is identified with the help of a critical reading of the new-institutional economic theory of the firm. Given a game theoretical definition of an institution, it is then shown that only by integrating it with the social contract as shared mode of reasoning the process of convergence to the beliefs system that backs an equilibrium institution may be started. Thus the chapter illustrates the egalitarian social contract as both an impartial justification for organizational constitutions and as an equilibrium selection device. It is shown that equilibrium selection through the social contract solves the problem of legitimization of authority in the organizational relation between a non-controlling stakeholder and the entrepreneur or the management of a firm, holding hierarchical authority over the stakeholder. The result is a fiduciary relation between a stakeholder (the trustor) and the owner, director or manager (the trustees) based on fair distribution of the firm surplus. This is the basis for the explanation of corporate social responsibility, understood as an extended model of organizational governance. It generalizes to all the possible ownership forms of the economic organization, giving credit to the idea that social responsibility is an overarching social norm in the field of organization governance.