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Q Academy of Management Review 2016, Vol. 41, No. 2, 216–228.

http://dx.doi.org/10.5465/amr.2016.0012 INTRODUCTION TO SPECIAL TOPIC FORUM MANAGEMENT THEORY AND SOCIAL WELFARE:

CONTRIBUTIONS AND CHALLENGES THOMAS M. JONES University of Washington THOMAS DONALDSON University of Pennsylvania R. EDWARD FREEMAN University of Virginia JEFFREY S. HARRISON University of Richmond CARRIE R. LEANA University of Pittsburgh JOSEPH T. MAHONEY University of Illinois at Urbana-Champaign JONE L. PEARCE University of California, Irvine In this Introduction to the Special Topic Forum on Management Theory and Social Welfare, we first provide an overview of the motivation behind the special issue. We then highlight the contributions of the six articles that make up this forum and identify some common themes. We also suggest some reasons why social welfare issues are so difficult to address in the context of management theory. In addition, we evaluate means of assessing social welfare and urge scholars not to make (or imply) unwarranted “wealth creation”claims. Over a decade ago, Walsh, Weber, and Margolis (2003) lamented the lack of attention to social welfare issues by management scholars.

Using data ranging from the research topics of papers published in major journals to membership in various Academy divisions, they made a strong case that organizational scholarship had drifted from its roots—which had emphasized both the social and the economic objectives of organizations—to focus overwhelmingly on the economic objectives alone.

This drift was regrettable, in their view, both because it limited the range of intellectual inquiry in organi- zational studies and because it meant that the find- ings of organizational scholarship were not beingapplied in ways that might result in better societies.

Two years later, theAcademy of Management Journal(AMJ,2005) published a special forum on organizational research in the public interest, again calling for more consideration of social welfare in organizational research.

Both Walsh et al. (2003) and many of the authors in theAMJspecial forum called for an integration of social and economic objectives. Neoclassical economists might have suggested that this call was/is unnecessary. A market-oriented economic system has been defended from a number of per- spectives, including the protection of political freedom through economic freedom, the pro- tection of property rights, and the honoring of contractual obligations. But an important foun- dational justification for the system is based on utilitarianism, the moral philosopher’s term for Lynn Stout, originally a special issue editor, also made contributions to this special topic forum. Judith Edwards con- tributed several editorial refinements. 216 Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s express written permission. Users may print, download, or email articles for individual use only. social welfare—sometimes expressed as the greatest good for the greatest number. More par- ticularly, a version of market capitalism that closely approximates neoclassical microeco- nomic models of perfect competition—for exam- ple, competition based on price, a laissez-faire approach to governmental involvement in the economy, and a profit (or shareholder wealth) maximization objective for firms—is posited to produce high levels of social welfare because it puts society’s resources to their most efficient uses. In short, social objectives could be assured if economic objectives were attained (Jensen, 2002).

Unfortunately, there are several reasons to doubt that this relationship is applicable in today’secon- omy. First, as we discuss more fully below, the characteristics of modern market capitalism bear little resemblance to the conditions under which the perfect competition model assures social welfare.

This divergence of conditions strongly suggests that the model’s prescriptions—in particular, laissez- faire governmental policy and a shareholder wealth maximization objective for corporations—are un- likely to lead us to ever-increasing levels of social welfare.

A second and related point is that a substantial number of scholars, practicing managers, and en- trepreneurs are actively engaged in making the perfect competition model even less applicable to the contemporary economy. A great deal of research in strategic management—that is, the search for sustainable competitive advantage—depends on market conditions that deviate significantly from those of perfect competition and, in some cases, in- volve anintentionto carve out“mini-monopolies”in order to obviate competition based on price alone. 1 While it may make sense to explore means of exploiting market frictions to enhance firm profit- ability or start new ventures, determining whether social welfare improves is an empirical question; simply assuming that social welfare is enhanced in conjunction with improvedprofits is inappropriate.

Third, it takes a substantial leap of faith to con- clude that some corporate actions taken to increase shareholder wealth actually improve social wel- fare. Consider the case of massive layoffs. These actions often do result in increases in shareholder wealth (via stock price increases), but they also re- sult in substantial hardships—economic, social,and psychological—for the displaced workers and for the surviving workers who must take on the re- sponsibilities of their former coworkers. Thus, it is not clear that all massive layoffs that enhance shareholder welfare simultaneously enhance so- cial welfare, even in the long run. Indeed, Jones and Felps (2013b), using stakeholder happiness as their measure of social welfare, suggest that society as awholemaybemademuchworseoffbymassive layoffs, at least in the short run. A similar calculus could be applied to corporate practices at extreme ends of a“potential harm spectrum.”Hiring con- tractors of questionable repute to dispose of haz- ardous wastes might anchor one end of this spectrum. Cutting costs by increasing wait times for customer service calls might anchor the other end.

In both cases externality costs (to the environment and customers, respectively) are incurred and should be included in social welfare calculations.

Finally, the wisdom of relying on a model that fo- cuses exclusively on alleviating economic scarcity no longer makes sense. Throughout much of history, economic scarcity was a pressing social problem, and an approach focused on addressing scarcity may have been defensible, despite the social welfare problems created in its wake. However, now that material abundance better describes aggregate out- comes in most developed economies, social welfare problems, new and ongoing, are less easily dis- missed. Some of these problems have emerged with a vengeance, particularly in the United States—for example, scandals involving enormous sums of money, increasing inequality of wealth and income, underemployment, homelessness among former membersofthemiddleclassaswellasthechroni- cally poor, soaring health care costs, and a political system closely tied to the vested interests of corpo- rations and wealthy individuals. Thus, although the market-oriented economic system has an enviable record of making its citizens collectively richer, it is increasingly questionable whether it is capable of addressing some other urgent social welfare prob- lems that have emerged from the relationships be- tween the economy and the rest of society.

Nonetheless, despite calls from scholars repre- senting a range of disciplines (AMJ,2005;Walsh et al., 2003) and the noble vision of the Academy of Management—“We inspire and enable a better world through our scholarship and teaching about management and organizations”—the manage- ment literature has been remarkably quiet on the role of managers and corporations in first creating and now solving the problems that threaten social 1While lower prices have conventionally been associated with social welfare, product variety can also be a source of social welfare benefits (Dixit & Stiglitz, 1977; Spence, 1976). 2016217 Jones, Donaldson, Freeman, Harrison, Leana, Mahoney, and Pearce welfare. Indeed, little appears to have changed since Walsh et al. lamented an“eerie silence”in the management literature with respect to issues of human welfare at the societal level and urged management scholars to“bring social welfare back in”to their research agendas, most importantly by integrating social and economic objectives (2003:

860; 875). In this special topic forum our objective is to help fill this void by encouraging theoretical work that addresses important social welfare issues re- lated to the activities of large corporations in the economy and of those who manage them. In a later section we will address the“eerie silence”issue.

NEW APPROACHES TO MANAGEMENT THEORY AND SOCIAL WELFARE: THEMES AND CONTRIBUTIONS In examining the various perspectives taken by our contributing authors, two themes emerge.

First, fairness and justice are argued to be im- portant elements of social welfare; in other words, utilitarian measures of aggregate well-being— either economic (e.g., GDP) or human happiness (e.g., stakeholder happiness)—are not adequate metrics for social welfare.

In two of the included articles—Marti and Scherer (2016) and Mitchell, Weaver, Agle, Bailey, and Carlson (2016)—the authors argue that social welfare should not be understood in terms of eco- nomic welfare alone, at least not in terms of ag- gregate economic wealth (e.g., GDP). Marti and Scherer address the issue of financial regulation, beginning with an argument that social welfare is best seen in terms of three elements: efficiency (with a long scholarly history), stability (with a much shorter history), and justice (their main theme). Mitchell and colleagues make a case for a pluralistic view of social welfare. In the process, they find flaws in both economic welfare maximi- zation (through shareholder wealth maximization; e.g., Jensen, 2002) and stakeholder happiness en- hancement (Jones & Felps, 2013b).

Justice, Fairness, and“Many Objectives” Marti and Scherer (2016) begin by elaborating on the argument that social science theories not only describe social reality but also shape it. With this insight in mind, they raise the vital norma- tive question,“Howshouldthese theories shape our world?”In their illustrative example these authors show how financial regulation has, upto the present, focused primarily on economic ef- ficiency, with an occasional nod to economic stability. Building on the work of Habermas (1971), they argue that social welfare has three major components: efficiency, stability, and justice.

While stability has clearly taken a back seat to efficiency (witness the financial meltdown of 2008), in the perspectives of both scholars and regulators, justice has been given no seat at all.

Marti and Scherer submit that a very important question should be added to the list of regulatory concerns: Does the proposed regulation make the economy more just? For management theorists this question could be distilled to how the pro- posed regulation of financial innovations—high- frequency trading in their example—affects top incomes and income inequality. In essence, the authors question whether social welfare is actu- ally enhanced, irrespective of efficiency im- provements and stability preservation, if the great bulk of the benefits flow to those already well off. Ultimately, they advocate aninclusive(as opposed to a technocratic) approach to financial regulation, one that focuses on both the ends and the means of promoting social welfare. Distribu- tive justice, in the form of income inequality, also plays a prominent role in Cobb’s (2016) contribu- tion, discussed below.

Bosse and Phillips (2016) argue that if in our dominant theory of corporate governance—agency theory—we replaced the assumption of narrow self- interest with one ofself-interest bounded by norms of fairness, then positive reciprocal behaviors on the part of managers could be increased and neg- ative reciprocal behaviors could be reduced. This change in assumptions could not only enhance our ability to understand some anomalous agency theory–based empirical results but also could in- spire corporate boards to base executive con- tracts on a well-documented human behavioral tendency—a quest for reciprocity and fairness— and achieve social welfare gains throughagency benefits,as well as through the avoidance of de- structive agency costs based on“revenge.” Finally, Mitchell and colleagues (2016) address the metaphysical specter that haunts discussions of economic welfare—namely, the question of “one”versus“many.”Having more than one ob- jective aggravates complexity in decision mak- ing, and it is not surprising that a major strength of traditional neoclassical economic theory resides in its use of a single-valued metric—that is, “happiness”in nineteenth-century utility theory 218April Academy of Management Review and its twin concept,“marginal utility”(measured through preference rankings and indifference concepts), later on.

How about the corporation? Do we need a single yardstick or many yardsticks to evaluate its contri- bution to social welfare? Jones and Felps (2013a,b) have argued that corporate action requires a single- valued objective that allows managers to make principled choices among policy alternatives and that functions as an analog to the normative maxim that managers should optimize value for the firm’s equity owners. In contrast, Mitchell and colleagues maintain that adopting a multi-objective approach to managerial decision making permits the en- gagement of a broader array of market-enhancing preferences and market signals and allows a more inclusive process that enhances multidimensional social welfare. The authors envision an intra- corporate“marketplace”in which managers engage competing objectives. They argue that invoking a single-valued corporate objective would only hamstring the virtuous process of social welfare enhancement made possible by the existence of intracorporate markets among stakeholders.

Organizational Processes Second, several of the authors focus on the processes by which the twin objectives of eco- nomic and social welfare are enacted. Sonenshein (2016) explains how the perceived illegitimacy and equivocality of social issues act as deterrents to increased corporate attention to activities that enhance social welfare (beyond economic). Issue illegitimacy refers to perceptions that allocating resources to a particular issue falls outside of a justifiable basis for firm action, whereas issue equivocality deals with disagreement regarding the meaning of an issue, including its purpose, scope, and implications for the firm. In addition, Sonenshein’s article offers a meaning-making perspective that unpacks how social change agents can overcome these impediments through linking specific tactics (framing, labeling, im- porting, and maintaining) to different types of social issues (convertible, blurry, risky, or safe).

The author also explores the multiple levels of meanings that shape a social issue, including very macro levels, such as economic philoso- phies, and very micro levels, such as individuals’ beliefs. One of the many novel ideas advanced in the article is that although issue equivocality is often perceived as an impediment to action, it canalso provide an opportunity for social change agents to favorably shape the meaning of a social issue, thus leading to corporate actions that enhance social welfare.

At the firm level, process is also a focus of Bridoux and Stoelhorst (2016), particularly with regard to a firm’s relationships with stakeholders.

These authors employ relational models theory to create a hierarchy of relational modes based on their joint value creation capacity. In the context of knowledge-based firm/stakeholder endeavors, communal sharing relationships are shown to be superior to equality matching, authority ranking, and market pricing relationships. The choice among these relational modes is influenced by stakeholder perceptions of the model that are made salient by the firm’s behavior. The authors also argue that there is a tendency toward market pricing when the behavioral standards of the other modes are not met.

Finally, Cobb (2016) examines employment processes and how they contribute to, or un- dermine, social welfare. A central social welfare concern has been the growth in income inequality throughout the world. Heretofore, most commen- tators seeking to understand income inequality have focused on government policy, technology, or economic explanations to try to understand the growth in income inequality. Cobb demonstrates how scholars of organization and management can contribute to our understanding of this chal- lenge. He argues that the way managers structure the employment relationships in their organiza- tions is a key factor in producing relative societal income inequality. His theory contains several insights suggesting fruitful further research in management, as well as public policy recom- mendations. For example, he demonstrates how the spread of nominally market-focused com- pensation practices such as pay-for-performance, external hiring, and pay benchmarking lead to greater inequality within occupations, and most starkly within organizations. While management researchers have long documented the damage such systems can do to the collaboration on which organizational performance depends (e.g., Lawler, 1971; Pearce, 1987), Cobb draws our attention to the larger social welfare costs of such systems. Similarly, he documents how differ- ent ownership forms (e.g., private equity owner- ship) drive the management external orientation that exacerbates income inequality. His work opens a promising new avenue of management 2016219 Jones, Donaldson, Freeman, Harrison, Leana, Mahoney, and Pearce research and brings our understanding of orga- nizations to bear on a central public policy con- cern in many countries.

We were somewhat surprised that none of the submissions addressed (1) the role that religion could play in the relationship between manage- ment and social welfare, particularly in view of the recently created Management, Spirituality, & Religion Interest Group of the Academy of Man- agement, or (2) possible single-valued corporate objectives that include a stronger social welfare orientation (under the assumption that share- holder wealth maximization [e.g., Jensen, 2002] and stakeholder happiness enhancement [ Jones & Felps, 2013b] do not exhaust the possibilities).

In the former case, social welfare is inherently values based, and religions are inseparably connected to values. In addition, some religious organizations pursue social welfare through many types of programs in local communities and often worldwide, providing potential models for other organizations, including businesses. In the latter case, Walsh once called the corporate ob- jective issue“arguably the most important theo- retical and practical issue confronting us today” (2004: 349). In addition, whatever their shortcom- ings, single-valued objectives do have the benefit of radically simplifying both management prac- tice and management scholarship. Furthermore, multiple corporate objectives could be interpreted to mean that the pursuit of any one of them is ac- ceptable or, more cynically, that there is no objec- tive at all. Given the impetus of this special topic forum, perhaps future management scholarship will address these neglected themes.

WHY THE EERIE SILENCE?

As noted above, Walsh et al. (2003) claimed that there was an“eerie silence”among management scholars with respect to issues involving social welfare. If this is still true (and we believe it is), an important question emerges:Whyhave manage- ment scholars made so little progress in address- ing social welfare problems and, more specifically, integrating social and economic objectives? Here we suggest some reasons why this silence exists and, by extension, why it may emerge again, even in the wake of this special issue.

First, it is entirely possible that many individual scholars who populate our discipline believe that shareholder wealth maximization on the part of corporations does indeed lead to optimal socialwelfare. Although not all of these scholars are likely to be familiar with the details of the logic(s) behind this theorized relationship (e.g., Jensen & Meckling, 1976; Jones & Felps, 2013a), the shareholder wealth maximization objective remains appealing for a number of other reasons. First, as a single-valued objective, it is simple to articulate and, in theory, possible to implement (because multiple objectives cannot be maximized simultaneously). Second, it has a long history of acceptance by managers and management scholars. Third, it conforms to the mandates of financial markets—that is,“Wall Street.”Fourth, social welfare issues are often thought to be the concern of government, not busi- ness. Fifth, in theory, it renders profit-motivated activity morally legitimate in utilitarian/social welfare terms.

In addition, the single-valued shareholder wealth maximization objective renders manage- ment theory–based research much more tractable and, therefore, more attractive to management scholars. Theories based on economics are cer- tainly not“value free,”as was once claimed, but the values that underpin them are widely accepted, meaning that scholars employing them rarely have to address thorny questions involving values in their theoretical and empirical work.

Indeed, studies based on economics are highly amenabletothe“scientific method”that con- veys a great deal of legitimacy and prestige to many disciplines, including management. The as- sumptions of economics may not be as realistic as we might want them to be, but they render the re- search process much more manageable, a matter of no small concern to those of us whose careers depend on doing management research. Finally, figuring out how to assure that social welfare is improved in the context of management theory is very difficult, a topic to which we now turn.

Enhancing Social Welfare in the Economy 2 Social welfare is broadly defined in terms of the well-being of a society as a whole, encompassing economic, social, physical, and spiritual health.

Although the termsocial welfareis often defined 2Some of what follows is based on a utilitarian view of morality. This view evaluates acts and policies on the basis of whether they maximize certain kinds of consequences, usually couched in terms of“happiness.”Utilitarianism has been criticized on several grounds, the most prominent of which is its apparent failure to account for justice—that is, its apparent willingness to allow the ends to justify the means. 220April Academy of Management Review more narrowly to refer to government programs that provide assistance to needy individuals and families, here our reach is longer and comports with recent efforts to gauge social welfare more broadly. For example, UN-sponsored rankings of well-being rate countries on a range of factors, including economic (e.g., GDP per capita), health (e.g., healthy life expectancy), social (e.g., social support), andmoral (e.g., generosity and corrup- tion) dimensions (Helliwell, Layard, & Sachs, 2013). Gallup 3similarly ranks regions by well- being based on perceived social, financial, community, and physical health. Our task in this special topic forum is filling out our un- derstanding of social welfare writ large by fo- cusing on the role of the corporate sector.

In theory, there is an array of net benefits— benefits less costs for each individual—that is socially optimal. Indeed, there is no reason that such an optimum could not include concerns about stability and justice as well as efficiency (Marti & Scherer, 2016), or even several other di- mensions of welfare (Mitchell et al., 2016). Practi- cally, however, such an optimum would be enormously difficult to achieve even in a static world. In a dynamic world the slightest distur- bance would require a new optimal array of net benefits, rendering its achievement impossible in all but a theoretical sense.

If we narrow our focus to economic variables alone, microeconomic theory (specifically, the first fundamental theorem of welfare econom- ics) maintains that such an optimum can be achieved when a competitive equilibrium is reached. Such an equilibrium is possible only under conditions of perfect competition—for ex- ample, markets consisting of many buyers and many sellers, competition based on price alone, markets undistorted by government policies, perfect information, undifferentiated products, and zero externalities. In equilibrium, a state of Pareto optimality obtains; that is, no one can be made better off without making someone else worse off. The role of the firm in this scenario, from both practical and moral perspectives, is simple: firms should attempt to maximize profits.

From a practical perspective, profits are the mea- sure of firm efficiency and assure firm survival.

From a moral perspective, profit-maximizing firmsplay their designated role in a“rule utilitarian” moral system that assures maximal social welfare (Jones & Felps, 2013a). Thus, the pri- mary objective of managers is to maximize firm profits.

Unfortunately, many of the assumptions of perfect competition—many buyers, many sell- ers, and so forth—are violated in contemporary market capitalism and, according to the theory of the second best (Lipsey & Lancaster, 1956–1957), allof the assumptions must be met for optimality to be achieved. Importantly, moving closer to any one assumption (making it“more true”)—for example, breaking a large firm into several smaller firms through antitrust action—does not necessarily increase, and may actually decrease, aggregate social welfare. This means that man- agement cannot simply maximize shareholder returns and expect social welfare gains to emerge; improving social welfare has become a much more complex and less well-understood undertaking.

From the perspective of the principal-agent model taught to most business school students, complete contracting is assumed and share- holders are (by construction) the only residual claimants. However, in our world of incomplete and implicit contracts, there can be multiple re- sidual claimants—that is, stakeholders (Klein, Mahoney, McGahan, & Pitelis, 2012). From this perspective as well, because managerial de- cisions can have an impact on multiple stake- holders, improving social welfare becomes far more complex than simply maximizing share- holder wealth.

As compelling as the arguments of Marti and Scherer (2016) and Mitchell and colleagues (2016)maybewithrespecttomultipledi- mensions of social welfare, they further com- plicate the task of identifying improvements (let alone optima) in social welfare. Since the components of social welfare writ large—for example, efficiency, stability, and justice (Marti & Scherer, 2106)—are incommensurable (i.e., lacking a means of making principled trade- offs), we cannot deal with multiple dimensions of social welfaresimultaneously,makingaso- cialoptimum a destination beyond our reach.

Combined with the futility of pursuing aneco- nomicoptimum—equilibrium under perfect competition—as discussed here, focusing on Pareto improvementsin aggregate economic welfare becomes a reasonable approach, albeit 3Available at http://info.healthways.com/hubfs/Well- Being_Index/2014_Data/Gallup-Healthways_State_of_Global_ Well-Being_2014_Country_Rankings.pdf?t51449866045324. 2016221 Jones, Donaldson, Freeman, Harrison, Leana, Mahoney, and Pearce an incomplete one sinceit ignores questions of justice (Marti & Scherer, 2016) and intrinsic values (Donaldson & Walsh, 2015), among others (Mitchell et al., 2016). We can makesomeone economically better off without making any- one else worse off. Therefore, in the analysis that follows, incomplete though it may be, we focus onimprovementsin aggregateeconomic outcomes—Pareto improvements—as our stan- dard for the improvement of social welfare, as well as on improvements in firm profitability, the driving force behind many corporate ac- tions. We will return to the issue of multiple measures of social welfare at a later point in the discussion.

Pareto Improvements and Firm Profitability As noted above, the term Pareto improvements applies to exchanges/relationships wherein one or more parties are made better off without mak- ing any other party (parties) worse off. Because one party’s gain does not involve another party’s loss, there is always a net gain, resulting in un- ambiguous improvements in economic wel- fare. There are three generic ways to increase firm profits (along with various combinations of the three types), each with implications for social welfare. 4As derived from Figure 1, firms can (1) increase economic value and price while holding input costs constant, (2) reduce input costs while holding economic value and price constant, and (3) increase/reduce price while holding economic value and input costs constant. Under certain conditions, each of these profit-enhancing actions also enhances (or at least does notharm) nonshareholder stakeholders.

Figure 2 presents the components of eco- nomic cost in somewhat greater detail and makes explicit the participation of corporate stakeholders—for example, employees,sup- pliers, creditors, neighboring communities—in addition to customers (as recipients of consumer surpluses) and shareholders (as recipients of producer surplus). A reservation price is either (a)the most that a buyer is willing to pay for a good or service or (b) the least that a seller is willing to accept for a good or service. When these prices overlap, voluntary exchange can occur and, since few exchanges are madeatthe reservation price of either the buyer or the seller, both parties usu- ally receive surpluses.

Under category 1, firms meet the Pareto im- provement standard if they (1) develop new products/services or improve or differentiate existing products/services (thereby assuring marketdisequilibrium) without increasing costs, (2) raise prices no more than the incremen- tal economic value added, and (3) appropriate/ capture no more than the incremental surplus created by price increases and/or increased volume. New wealth is created and no one is made worse off. However, if the firm, as- sumed to have some market power under con- ditions of disequilibrium, raises pricesmore than the incremental economic value created, then surpluses for continuing customers will decline, violating the Pareto improvement standard.

In addition, Priem (2007) outlines a number of ways that go beyond new or improved products/services and that allow firms to grow theFIGURE 1 The Economics of Profit Making (from Peteraf & Barney, 2003) 4Note that under equilibrium conditions, firms areprice takers; they have no power to raise or lower their prices. Since we are dealing exclusively with conditions of economicdis- equilibrium, firms can raise or lower their prices and will presumably do so in accordance with the price/quantity re- lationship of the product/service in question. 222April Academy of Management Review unambiguously socially beneficial and, in some cases, may be socially harmful: employee layoffs or salary/wage cuts;reductions in employee benefits—e.g., health care coverage, pensions, sick leave; allowing“normal attrition”to overburden remaining employees; price concessions imposed on suppliers;non-price concessions imposed on suppliers— e.g., delivery schedules, payment terms; reduced customer service—e.g., lengthy waits for poorly trained customer service representatives, reduced warranty coverage; product/service price increases unsupported by cost increases; tax exemptions, zoning relaxation, or in- frastructure improvements extracted from local communities; environmentally risky resource extraction practices—e.g., BP’s operations in the Gulf of Mexico; and careless disposal of toxic wastes—e.g., tannery wastes in Woburn, Massachusetts, disposal in countries without protective regulations. In short, a number of common corporate ac- tions intended to increase profits certainly do not meet the Pareto improvement standard and may not improvenetsocial welfare. Simply equating improvements in shareholder wealth with social welfare improvements (wealth cre- ation), as is often done in the strategic man- agement literature (for explicit exceptions see Klein et al., 2012, and Peteraf & Barney, 2003), is not justifiable. Unless the profit-improving ac- tion can be shown to actually improve social welfare—that is, create newnetwealth—no conclusion to that effect should be drawn or implied.

Pareto Improvements and Other Elements of Social Welfare While the Pareto criterion is assumed to be applied in a world in which economic exchanges are voluntary—if one party does not benefit, he or she does not make the exchange—power differ- entials between exchange partners make it likely that, even if no one loses, the gains of the powerful will be greater, perhaps far greater, than the gains of the less powerful. Thus, re- peated applications of the Pareto criterion could result in increased concentrations of wealth, which re-raises the issue of multiple measures of social welfare.Marti and Scherer (2016) deal specifically with the (distributive) justice aspect of social welfare.

In terms of financial regulation, they argue, scholars and regulators put far too much empha- sis on efficiency, too little on stability, and almost none at all on justice. In fact, a criterion based on Pareto improvements could be applied to eco- nomic policy writ large; that is, efficiency (or sta- bility or justice) should not be improved at the expense of the other two. For example, regulatory changes intended to improve efficiency in fi- nancial markets could not be implemented if they resulted in less stability in financial mar- kets or an increase in the Gini coefficient, 5 a measure of equality—for example, income, wealth—in the population. However, given the economic collapse of 2008 and ongoing increases in concentrations of wealth, we suspect that many citizens of Western democracies would sacrifice a fair amount of efficiency for improved stability. Those in the United States would probably prefer more egalitarian distributions of wealth and income as well.

Kaldor Improvements Situations in which profit-generating corpo- rate actions do not harm any nonshareholder stakeholders—Pareto improvements—far from exhaust the social welfare possibilities, however.

Indeed, opportunities for Pareto improvements are likely to constitute a relatively small pro- portion of potential corporate actions. Nicholas Kaldor (1939) offered one means of extending Pareto improvements to include actions for which trade-offs between shareholders and other stakeholders are required. 6If the benefits antici- pated by one party are great enough to allow compensation adequate to“make whole”those who would be harmed, the policy in question would be regarded as an improvement in welfare 5Higher Gini coefficients connote less equal distributions of wealth or income; lower coefficients connote greater equality.

Among national economies, most Gini coefficients fall in a range of 0.20 to 0.50. For example, for OECD countries, over the 2008–2009 time period, after-tax Gini coefficients ranged between 0.25 and 0.48, with Denmark the lowest and Mexico the highest. For the United States, the country with the largest population in OECD countries, the after-tax Gini coefficient was 0.38 in 2008–2009.

6Some economists believe that Kaldor’s extension of the Pareto criterion should be applied only at the macro level (e.g., governmental regulations). We see no reason that it cannot be applied at the corporate policy level as well. 224April Academy of Management Review and desirable under Kaldor’s criterion. 7Although Kaldor’s formulation involves onlyhypothetical compensation, it is sufficient to meet the stan- dards of many forms of utilitarianism—that is, those that focus solely on aggregate economic welfare, without regard for the distribution of harms and benefits. As long as the“winners’”gains exceed the“losers’”losses, utilitarian standards are met. Those whose wealth/income is dependent on shareholder returns would become richer owing to“efficient”(but uncompensated) wealth transfers from nonshareholder stakeholders, who would be- come progressively poorer. 8 Indeed, repeated applications of the Kaldor criterion could result in even more rapid in- creases in concentrations of wealth/income than repeated applications of the Pareto criterion. Un- der Pareto, there are no losers; under Kaldor, not only are there losers but they are uncompensated.

In addition, the Pareto approach has the advan- tage of being based on voluntary exchanges, while the Kaldor approach could be highly co- ercive. Although the Kaldor criterion would seem to be an improvement on the apparent current “social welfare”criterion (i.e., shareholder wealth creationiswealth creation) because corporate actions resulting in reductions in net social wel- fare are not allowed, the distributive justice im- plications remain very significant. For these reasons we do not endorse Kaldor improvements as an alternative to Pareto improvements.

Perhaps because Kaldor was concerned only with hypothetical compensation,actual compen- sationof those harmed by corporate policies— that is, wealth transfers, externalities—has never been seriously considered. Nor is it surprising that such harms do not play a role in attributions of economic efficiency that accrue to profit- maximizing corporate behavior. However, the fact that we rarely calculate the extent of harms caused by specific corporate policies, let alone compensate those harmed, does not diminish the harms themselves. And because the Kaldor cri- terion is itself fraught with thorny problems both theoretical and practical (e.g., Layard & Walters,1978; Sidak & Spulber, 1996; Williamson, 1996), we cannot endorse a criterion such asKaldor im- provements with compensation. 9We do, however, suggest that, given the problems with other options—equating shareholder wealth creation with wealth creation/social welfare improvement, Pareto improvements, and Kaldor improvements— such a criterion might represent an intriguing line of inquiry for future exploration, 10 but one that is far too complex to examine with any thorough- ness here. To sum up, the assessment and mea- surement of social welfare and, by extension, the relationship of social welfare to management theory are not problems for which easy solutions are apparent.

CONCLUSIONS AND IMPLICATIONS The most striking conclusion that can be drawn from the six excellent articles that make up this special topic forum and our own examination of the role of social welfare in management theory is that assessing and measuring social welfare is a very complex and difficult undertaking. One theme that emerges from the included articles is that social welfare cannot be understood in terms of economic efficiency alone. Two articles (Marti & Scherer, 2016; Mitchell et al., 2016) directly address this issue, and a third (Cobb, 2016) addresses it implicitly. Marti and Scherer (2016) and Cobb 7What we have called the Kaldor criterion is often referred to in the economics literature asKaldor-Hicks efficiencyafter Kaldor and John Hicks (1939), who added the provision that those potentially harmed by an action could (in theory) pay the potential actor not to proceed with the action.

8Some commentators (e.g., Hartman, 2006; Smith, 2012) be- lieve that this process is already well underway. 9On its face, compensating nonshareholder stakeholders for wealth transferred to producer surplus (Figure 2) makes no sense. If producer surplus is used to compensate non- shareholders for their losses, there is no net gain in producer surplus. Indeed, this sort of wealth transfer is a zero-sum game; that is, producer surplus increases (approximately) equal (nonshareholder) stakeholder surplus decreases. It appears that no new wealth is created. However, when producer sur- plus (profit) is translated into shareholder wealth, this is no longer true. Because price/earnings (P/E) ratios for corporate shares are almost universally greater than 1 to 1 (among S&P 500 firms, P/E ratios averaged from 13.01 to 16.66 in the period from September 2011 through December 2012 [ycharts.com, 2013]), shareholderwealthgains—share price increases—are likely to be greater than stakeholder losses, leaving resources available to compensate harmed stakeholders.Importantly, compensation must be paid in company stock. An unpublished working paper authored by two of the special issue editors of this special topic forum, entitled“Sustainable Wealth Crea- tion”(Jones & Freeman, 2013), begins an exploration of this possibility.

10To paraphrase Williamson (1996: 1014), to argue that an approach is flawed does not establish that there is a superior feasible alternative. All feasible options may be flawed, and choices must be made from the feasible alternatives (Williamson, 1996). 2016225 Jones, Donaldson, Freeman, Harrison, Leana, Mahoney, and Pearce (2016) focus on issues of distributive justice, while Mitchell et al. (2016) make it clear that there are multiple values worth preserving. Unfortunately, assessing social welfare in terms of multiple in- commensurable measures is well beyond our current capabilities. As a result, we focused on economic welfare first and took distributive jus- tice into account after the fact.

In terms of economic welfare—that is, wealth creation—alone, we examined three possible approaches to improving social welfare and speculated on a fourth. First, we concluded that the current practice of equating share- holder wealth improvement with social welfare improvement—explicitly or implicitly—should be abandoned in both management theory and management practice. The assumptions on which the model that supports this conclusion is based bear no resemblance to the realities of twenty-first-century market capitalism. Fur- thermore, many actions taken by corporate managers to improve company profits harm non- shareholder stakeholders of the firm. The losses must simply be absorbed by these stake- holders. Indeed, they are rarely, if ever, mea- sured or counted in calculations of economic efficiency. For this reason it is likely that some of these actions do not result in net improvements in social welfare, and some may actually result in social welfare losses. Furthermore, in many cases, because shareholders gain at the expense of other stakeholders, distributions of incomes and wealth become increasingly unequal, a dis- tributive justice concern. Finally, actions taken under the banner of shareholder wealth im- provement are fundamentally coercive; that is, the losses of nonshareholders are not voluntarily accepted.

The one approach that yields unambiguous im- provement in social welfare, at least with respect to the discrete action under consideration, is the Par- eto improvement criterion. Making someone better off without making anyone else worse off does im- prove social welfare. However, corporate actions for which there are winners but no losers make up a relatively small proportion of all such actions, meaning that the Pareto criterion cannot be widely applied. Furthermore, although voluntary eco- nomic exchanges, by definition, improve the wel- fare of both parties, differences in bargaining power may mean that repeated Pareto improving exchanges lead to increasingly unequal distribu- tions of income and wealth. Nonetheless, nocoercion is involved in the voluntary exchanges that underpin Pareto improvements.

Employment of the Kaldor improvement crite- rion holds the possibility of obtaining actual so- cial welfare improvements for a full range of corporate decisions. If winners could (hypotheti- cally) compensate losers for their losses and still register gains, social welfare would be improved.

The hypothetical nature of this criterion is a key element here. As long as no actual compensation is involved and the gains of the winners exceed the losses of the losers, the Kaldor criterion is satisfied. And although greater economic effi- ciency is achieved, distributions of income and wealth are likely to become substantially more unequal. In addition to this distributive justice concern, Kaldor improvements clearly involve coercion; losers do not accept their losses voluntarily.

An approach that we represented as an“in- triguing line of inquiry for future exploration” might be called Kaldor improvements with com- pensation. Because this approach is laden with thorny theoretical and practical problems, a full exploration of the prospects for this criterion would involve an analysis well beyond the scope of this article. However, other scholars might give this possibility further consideration, particularly in view of the fact that shareholder wealth gains are measured in share price increases, which grow in proportion to the P/E ratio of the firm’s stock (usually 10-1 or more) rather than in direct proportion to stakeholder losses. If this relation- ship holds, ample resources could be made available to compensate (in company stock) those harmed by actions taken to increase shareholder wealth.

We note that two of the articles included in this special topic forum appear to be based on Pareto improvements, the one social welfare criterion that can be unambiguously linked to social wel- fare improvement. Bridoux and Stoelhorst (2016) show that communal sharing firm/stakeholder relationships are more efficient than other re- lational modes. Since no other stakeholders ap- pear to be harmed, the Pareto criterion is met. The same conclusion can be reached with respect to the Bosse and Phillips (2016) article. Introducing notions of fairness and reciprocity into the con- tracting process involving the firm’s board and its top executives could result in reduced agency losses and possible agency benefits in corporate governance. No stakeholder group appears to be 226April Academy of Management Review harmed in this revised process, again meeting the Pareto improvement criterion.

In terms of the implications of this special topic forum in general, and of this introduction in par- ticular, we offer the following. With respect to management scholarship, Marti and Scherer (2016) remind us that our theories not only de- scribe social reality but also shape it. With this caveat in mind, we strongly urge management scholars to take social welfare considerations into account in their theorizing and empirical re- search. This consideration could take the form of a thoughtful assessment of the social welfare implications of their work; relying on the as- sumption that increasing shareholder wealth in- variably leads to social welfare advances can no longer be justified. The same recommenda- tion applies to practicing managers as well; Friedman’s (1970: 124) claim that“the social re- sponsibility of business is to increase its profits” cannot be taken as gospel any longer. In addition, we hope that management scholars will be in- spired to directly address social welfare concerns in their theory building and empirical studies. If they do, we need not experience another“eerie silence”with regard to social welfare issues in management research once the dust settles on this special topic forum. And if theories do shape social reality, as we believe they do, the“better world”envisioned by the Academy of Manage- ment may begin to take shape.

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Thomas M. Jones([email protected]) retired as the Boeing Professor of Business Manage- ment at the University of Washington’s Foster School of Business. He received his Ph.D. in the political, social, and legal environment of business from the University of California, Berkeley. His research interests include stakeholder theory, normative theories of the firm, and the intersection of business ethics and corporate strategy.

Thomas Donaldson([email protected]) is the Mark. O. Winkelman Professor in the Wharton School at the University of Pennsylvania. He also holds a secondary ap- pointment in the Department of Philosophy, University of Pennsylvania. He received his Ph.D. in philosophy from the University of Kansas. He studies corporate governance and business ethics.

R. Edward Freeman([email protected]) is a University Professor and the Olsson Professor of Business Administration at the Darden School, University of Virginia.

He received his Ph.D. from Washington University. His research interests include stakeholder theory and business ethics.

Jeffrey S. Harrison([email protected]) is a University Distinguished Educator and the W. David Robbins Chair in Strategic Management at the University of Richmond. He received his Ph.D. in strategic management from the University of Utah. His research focuses on stakeholder theory, corporate strategy, collaborative strategy, and mergers and acquisitions.

Carrie R. Leana([email protected]) is the George H. Love Professor of Organizations and Management at the University of Pittsburgh, where she holds appointments in the Graduate School of Business, the School of Medicine, and the School of Public and In- ternational Affairs. She received her Ph.D. in organizational behavior from the University of Houston. Her current research examines the effects of financial deprivation on worker opportunity and performance.

Joseph T. Mahoney([email protected]) is the Caterpillar Chair of Business in the College of Business at the University of Illinois at Urbana-Champaign. He earned his Ph.D. in business economics from the Wharton School at the University of Pennsylvania.

His research focuses on the economic foundations of strategy.

Jone L. Pearce([email protected]) is Dean’s Professor of Organization and Management at the Paul Merage School of Business, University of California, Irvine. She received her Ph.D. from Yale University. She studies the effects of interpersonal processes, govern- mental, and organizational control systems on organizational behavior. 228April Academy of Management Review Copyright ofAcademy ofManagement Reviewisthe property ofAcademy ofManagement and itscontent maynotbecopied oremailed tomultiple sitesorposted toalistserv without the copyright holder'sexpresswrittenpermission. However,usersmayprint, download, or email articles forindividual use.