mba assignment: memo

" Academy ol Management Beview 1994.

Vol. 19, No. 2, 252-284.

TOWARD A UNIFIED CONCEPTION OF BUSINESS ETHICS: INTEGRATIVE SOCIAL CONTRACTS THEORY THOMAS DONALDSON Georgetown University THOMAS W. DUNFEE University of Pennsylvania "Would you tell me, please, which way I ought to go from here?" Alice asked the Cheshire Cat. "That depends a good deal on where you want to get to," said the Cat. "I don't much care where..." said Alice.

"Then it doesn't matter which way you go," said the Cat. (Carroll, 1983:

72) Throughout its meteoric rise over the last two decades, the field of business ethics has been troubled by a lack of direction and has become, like Alice, entangled in its own logic. Its problem stems from the discor- dant research methods used to explore ethics. On the one hand, business ethics research can be informed by empirical ideas, that is, by concepts that describe and explain factual states of affairs, such as managerial motivation, organizational accountability structures, and relationships between ethical behavior and financial performance. In other words, it can be informed by the "is" of economic affairs. On the other hand, busi- ness ethics research can be informed by normative' concepts, that is, by We thank the following people for their helpful comments on successive drafts of this article: Anita Cava, Dennis Collins, Phil Cochran. Henri Claude DeBettignies, Wanda Fo- glia. Bill Frederick, Ed Freeman, David Fritzche, Paul Hodapp, Michael Keeley, Eric Orts, Diana Robertson, Bill Shaw, Richard Shell and Iwao Taka. We also benefitted from the comments of workshop/conference participants at the Association for Practical and Profes- sional Ethics, Copenhagen Business School, the European Business Ethics Network, George- town University, INSEAD, Notre Dame, St. John's Law School, University of Michigan, Uni- versity of North Carolina, University of Texas at Austin, Wake Forest University, Western Michigan University, and the Wharton School.

' We use the term normative in the philosophic sense; it is a prescriptive rather than descriptive term. It provides guidance about actions or policies instead of describing them.

Yet, unlike the sense of the word sometimes used in management literature, our use of the term excludes prescriptive but merely instrumental uses. The instrumental sense of "nor- mative" is hypothetical; it says, in effect, "If you want to achieve X, then do Y." For example, "If you want lower per-unit cost, expand market share." In contrast, the philosophical sense is not hypothetical but "categorical"; it says, in effect, "Do this because it is the right thing to do." We also contrast our use of the term normative from the way it is often used in the social sciences to denote typical or average behavior. For a useful discussion of the philo- sophical versus social science use of the term normative, see Waterman, 1988.

252 1994 Donaldson and Dunfee 253 ideas which, although not necessarily grounded in existing business practices and structures, are what ethicists call prescriptive. They guide us to what we should do.

In this vein, most philosophers remind us that no amount of empirical accuracy, including an infinite array of facts, can ever by itself add up to an "ought" (Sorley, 1904/1969). To suppose that one can deduce an "ought" from an "is," or, what amounts to the same thing, that one can deduce a normative ethical conclusion from empirical re- search, is to commit a logical mistake some dub the "naturalistic fallacy" (Moore, 1903/1951: 10-14).

These two approaches to business ethics, which we shall call the empiricai and the normative, have produced two powerful streams of business research. During the last 15 years, researchers with philosoph- ical training have introduced purely normative, nonempirical methods to the study of business ethics, just as they introduced them earlier to the fields of legal and medical ethics. In this way, the philosophical tradition of ethical theory has contributed rigor to ongoing discussions of business ethics (Barry, 1982; Bowie, 1988; Donaldson, 1982; Freeman & Gilbert, 1988; French, 1979; Gauthier, 1986; Ladd, 1970; May, 1987; Nickel, 1974; Sen, 1985; Shue, 1981).

Meanwhile, using the alternative perspective, business school re- searchers with training in empirical methods have applied their tech- niques (often adapted from existing approaches in marketing, finance, and elsewhere) to study important issues in corporate and organizational ethics (Akaah & Riordan, 1989; Cochran & Wood, 1984; Fritzsche & Becker, 1984; Hunt, Wood, & Chonko, 1989; Trevifio & Youngblood, 1990; see par- ticularly Randall & Gibson, 1990, and sources cited therein for an exten- sive overview of this literature). This research has been extended by the development of frameworks suggesting relationships among key behav- ior variables and interconnections between the two divergent streams of research (Ferrell & Gresham, 1985; Hunt & Vitell, 1986; Jones, 1991; Trevifio, 1986). These frameworks focus on predicting or understanding ethical behavior, and they have generally incorporated either broad statements of ethical theories, such as utilitarianism and rights and jus- tice (Ferrell & Gresham, 1985), or they have relied upon concepts from moral psychology (Jones, 1991; Trevifio, 1986).^ ^ Even though none of these irameworks attempts to develop an explicitly normative or contractarian perspective,^ Jones's framework has some important parallels with the ap- proach introduced in this article. Jones's emphasis (1991) on the context of ethical decision making and his stressing that "human beings may respond differentially to moral issues in a way that is systematically related to characteristics of the issue itself" (1991:

372) is con- sistent with our own claim that normative and empirical factors can influence one another, and his incorporation of the factor of social consensus with its emphasis on implied social agreement is implicitly contractarian.

^ One exception is Reidenbach and Robin (1990), whose multidimensional scale for evaluating perceptions of ethical content incorporates two contractarian factors recognizing unspoken promises and unwritten agreements. 254 Academy of Management Review April Yet despite these preliminary efforts at reconciling the two disparate viewpoints, the two worlds of empirical and normative research in busi- ness ethics remain at a respectful distance from each other. Trevifio and Weaver (1993) articulate clearly the contrasts between the two ap- proaches, noting that the sharpest differences lie between the methods used by empirical researchers and philosophical ethicists in their discov- ery and analysis of information.

In this article, we seek to advance the interconnection between em- pirical and normative research in business ethics by presenting a norma- tive theory, called integrative social contracts theory (ISCT), which incor- porates empirical findings as part of a contractarian process of making normative judgments. Derived from roots in classical and social contract theory, this integrative theory recognizes ethical obligations based upon two levels of consent: first, to a theoretical "macrosocial" contract appeal- ing to all rational contractors and second, to real "microsocial" contracts by members of numerous localized communities. Through this process, we seek to put the "is" and the "ought" in symbiotic harmony, requiring the cooperation of both empirical and normative research in rendering ultimate value judgments. In order to render normative judgments under the contractarian framework presented, it is necessary first to make ac- curate empirical findings concerning the ethical attitudes and behaviors of members of relevant communities. The emphasis on the role of com- munities in generating moral norms characterizes this approach as com- munitarian. The primary focus of this article is on the exposition of the overall integrated theory and on identifying implications for further em- pirical and normative research.

INTEGRATIVE SOCIAL CONTRACTS THEORY We label the theory we are proposing integrafive sociai contracts theory (ISCT) because it integrates two distinct kinds of contracts. The first is a normative and hypothetical contract among economic partici- pants, a social contract similar to the classical contractarian theories in philosophy and political economy. This general contract, in turn, defines the normative ground rules for creating the second kind of contract. The second is an existing (extant) implicit contract that can occur among members of specific communities, including firms, departments within firms, informal subgroups within departments, national economic orga- nizations, international economic organizations, professional associa- tions, industries, and so on. The aggregate of these extant social con- tracts contains much of the substance of business ethics. We believe that this way of conceiving business ethics not only helps one in understand- ing the normative justification for business decisions, but it also helps one in reaching such decisions.

Existing normative theories and concepts, such as stakeholder 1994 Donaldson and Dun/ee 255 approaches (Carroll, 1989; Freeman, 1984; Hosseini & Brenner, 1992; Mez- nar, Chrisman, & Carroll, 1990; Preston & Sapienza, 1990:

362-67) or philo- sophical "Deontology" (Kant, 1785/1959) and "Utilitarianism" (Mill, 1965), provide general guidance but fail to reflect the context-specific complex- ity of business situations. Consider, for example, three kinds of ethical problems often confronted by multinational managers. In the first, the manager worries about giving and accepting gifts and entertainment; in the second, she or he wonders about the ethics of certain negotiation practices; and in the third, she or he wonders about the propriety of com- pensating employees not with money, but with personal benefits such as housing and guarantees of employment for their children. Now in all three of these contexts, the advice given by each traditional theory is suitable, but frustratingly vague. Stakeholder approaches are merely able to advise this manager to consider both the interests of stockholders and other "stakeholders," (i.e., employees, community residents, custom- ers, etc.). Kantian Deontology is only able to advise the manager to search for the general principle that she or he could follow in that particular case and which, furthermore, satisfies the test that she or he could will all other manageis to follow the same principle under relevantly similar circumstances. Finally, Utilitarianism merely advises the manager to choose the action from among alternative courses of action that will maximize the future welfare of the most people. Even though each rec- ommendation offers a broad-brushed guide to action, none speaks di- rectly to the relevant ethical expectations or shared understandings of the participants.

None of the general ethical theories reflects directly the cultural pat- terns of business and friendship in gift giving, the culture-specific or industry-specific expectations surrounding negotiation practices, and/or the differences between cultures with a traditional acceptance of corpo- rate paternalism and ones with highly individualistic, nonpaternalistic beliefs. Each can handle the obvious situations well enough: If gift giving includes blatant fraud, if negotiations involve physical coercion, and if nonmonetary employee compensation serves to make economic prisoners of employees, then stakeholder approaches, Kantian Deontology, and Utilitarianism offer univocal advice. But most business situations involving community values are neither so stark nor so well defined. In short, each of the three recommendations is helpful—but only up to a point. For the purpose of illustrating different aspects of ISCT, we will return from time to time to these three issues (i.e., gift giving and receiv- ing, questionable negotiation practices, and nonmonetary employee compensation).

The key to understanding ISCT, and, in turn, dealing with one aspect of the "is"/"ought" problem, lies in understanding two concepts that we intend to explore in some detail, namely, bounded moial iationality and sociai contracts. 256 Academy of Management Review April Bounded Moral Rationality Imagine that you are a master of moral theory. You have read and absorbed the moral theories from Aristotle's Eudaemonism and Spinoza's Rationalism to Kant's Categorical Imperative and Sidgewick's Methods of Ethics. Imagine further that you have either determined which one of these traditional theories is best or have constructed a wholly new "best" theory using parts of existing theories. Now imagine that someone asks you to define unethical employee compensation. Will you be able to pro- vide a satisfactory answer based upon your extensive knowledge and your new moral theory? Will you be able to know the correct course of action in all contexts where employee compensation is at issue? For ex- ample, is it appropriate to pay employees the average wage rate in de- veloping countries when that rate is far lower than wages paid for similar work in developed countries?

So long as the only thing you knew was "the best moral theory," you would be hard pressed to produce a satisfactory definition of unethical employee compensation or to know the correct course of action in all circumstances. The reason is that moral rationality in economic contexts is stiongly bounded.

In using the term moial rationality we presume what is granted by all major contemporary and traditional moral theorists, namely, that moral concepts are proper objects of rational analysis and that they possess at least minimal objectivity. Extreme moral or cultural relativism is ruled out; (Donaldson, 1989: 10-29; Stace, 1937; Wellman, 1963). We also assert that moral rationality is bounded, by which we mean that otherwise ra- tional moral agents, when applying moral theory to actual situations, confront confining limits. First, they confront their own finite capacity to comprehend and absorb all details relevant to ethical contexts. Consider a contemporary ethical issue debated in many developed countries, namely, the morality of takeovers, acquisitions, and mergers (Hoffman, Frederick, & Petry, 1989).

To assess the morality of corporate acquisitions, whether in general or in a specific instance, one must reference a maze of complex facts. This is true even if one believes oneself to be reasonably clear about the normative or ethical concepts at stake. It is also true whether one is a committed Rawlsian, believing that systemic inequali- ties are unjust unless they work to the advantage of everyone, including the least well off, or if one is a Hayakian or Friedmanite, believing that liberty is the linchpin of market morality. One needs to have a grasp of the consequences of acquisitions for the stockholders of the acquired firm, for the stockholders of the firm doing the acquiring, for any bondholders and other creditors, and for the managers and employees, among many oth- ers.

One must have some view as to the long-term social consequences of accumulated debt, or of the tendencies toward increased or decreased efficiency of corporations under new management. This aspect of the 1994 Donaldson and Dunfee 257 boundedness of moral rationality is similar to Herbert Simon's concept of the same name. Human beings have finite intellectual resources and will inevitably "satisfice" in both economic and moral decision making.

But rational moral agents confront another kind of limit, different from that popularized by Simon. Their moral rationality is bounded by the limited ability of moral theory to account for commonsense moral convic- tions and preferences. Contemporary discussions reveal instances of slip- page between what common sense asserts is morally correct and what moral theory dictates. For example, common sense will hold that family members should be preferred over strangers, and if a total stranger were drowning alongside one's spouse, and only one could be saved, common sense dictates saving one's spouse. But significant familial partiality is difficult to reconcile with traditional moral theory (Donaldson, 1990). (See also.

Symposium on Impartiality and Ethical Theory, in Ethics, special edition, July 1991.) Certainly no one has argued that moral theory should be tested entirely by reference to settled moral conviction; indeed, it is because people often want to do the reverse (i.e., to test common convic- tion by theory) that theories are developed. Yet most moral theorists find it hard to imagine that a correct theory would fly in the face of some of the most universally held, firmly believed moral convictions.

One disturbing result of what we are calling bounded moral ratio- nality is moral uncertainty. For insofar as the correctness of each moral decision must be referenced to an infinite array of facts, or subject to theories that clash with key moral convictions, people are doomed to confront moral risk. Life is more confusing than one might hope.

Methods exist to deal with such confusion, as we will explain, but for the time being it is crucial to notice that moral life in economic affairs is not only bourided, but strongly bounded. It is this final aspect of the boundedness of moral rationality in economic life that makes business ethics even less determinant from the standpoint of general moral theory than ethics in, say, family or political life. We begin by noting that eco- nomic systems are not products of nature. In contrast, some human as- sociations may be considered in large part products of nature. The family no doubt fits this description. But economic systems are products of arti- fice, not nature, and their structures can and do vary immensely. Such systems (which include the laws, practices, and value systems that in- form economic practices) are, in a word, artifacts. People create them.

People make them what they are, and people might have chosen to make them differently.

An analogy will help. Because they are artifacts, economic systems share important characteristics with games. Just as people can change the rules of games or invent entirely new games, so too can they change the rules of economic practice, or they can invent entirely new practices.

The evolution of the corporation and of market economics from 1800 to the present are striking examples of the plasticity of the corporate form and of 258 Academy of Management Review April capitalism (Chandler, 1977), as is the collapse of the managed economies in the former Soviet Union and Eastern Europe. The definitions of eco- nomic practices are stipulated rather than given by nature.

Yet this amazing plasticity creates problems for the moral analysis of economic systems. For, in the same way that it would be impossible to create a general theory of the ethics of games without knowing in ad- vance which game was under consideration, so too it is impossible to create a general theory of the ethics of economics without knowing at least the general shape of the economic system under consideration. The ethics of basketball, or of soccer or squash, must be contoured somewhat to the rules of these particular games. Similarly, the ethics of client en- tertainment, negotiation, and employee compensation must be contoured somewhat to the rules of particular economic systems in which they occur.

In an analogous way, knowing all the moral theory in the world does not equip a person to specify in advance the moral norms of business ethics, much less the norms for the specific contexts of gift giving, nego- tiation, and employee compensation. In each, the ethical norms must be contoured to the rules of the specific economic practices and the notions of fairness of the participants. This is not to deny that some extremely general moral prescriptions hold for all economic practices and, for that matter, for all economic systems. For example, refraining from flagrant dishonesty, torture, and intentional killing are required in all human activities. Nor is it to deny that economic systems, unlike games of pick- up basketball, have dramatic implications for people who are not directly a part of the rule-formation process.

It is, however, to deny that a person can know in advance what the correct rules of business ethics are for a specific system without knowing more about the system and its participants. It is to deny, for example, the possibility of knowing in advance whether ethics requires that a high company official from an airline visit the surviving relatives of an air- plane crash and present them with money (as Japanese airline officials do), in contrast to, say, merely offering sympathy and minor assistance.

To know what ethics requires here, a person must know both what local custom encourages and also something about the system of compensa- tion in the economic system. In the United States, a well-developed ad- versarial system exists for delivering compensation to victims. It is cum- bersome and expensive, but relatively reliable. In Japan and elsewhere, the legal system for delivering compensation is less developed and less reliable. Thus, it would be reasonable to place greater moral burdens on the shoulders of Japanese corporate officials, than on those of U.S. cor- porate officials, for compensating and helping the families of victims.

In sum, rationality in economic ethics is bounded in three ways: by a finite human capacity to assess facts, by a limited capacity of ethical theory to capture moral truth, and by the plastic or aitifactual nature of economic systems and practices. 1994 Donaldson and Dun/ee 259 In addition to the arguments already offered for bounded moral ra- tionality, one can evaluate the claim of boundedness by looking for the consequences one should expect to follow if the claims were true. Were moral rationality bounded, one should expect to find that moral norms governing socioeconomic interaction vary widely from system to system and that they shift significantly over time. One also should expect that using abstract, universal concepts of ethics to solve specific ethical di- lemmas in business would be extremely difficult. Finally, one should expect to find frequent appeals to system-specific or culture-specific prac- tices in justifying ethical behavior.

All three predictions are fulfilled and are familiar features of the economic landscape. Concepts of business ethics vary significantly from culture to culture, as well as from time period to time period. What counts, for example, as "usury" varies dramatically from Western to Moslem cul- ture, and, indeed, has changed radically over time, even in Western cul- ture, from the Middle Ages, when all lending at interest was prohibited, to today, when all but the highest levels of interest are allowed with proper disclosure (Cameron, 1989: 48-92, 322-344). It is also true that using abstract, universal concepts of ethics to solve specific ethical dilemmas is notoriously difficult, and as business ethics instructors fre- quently remark, the course that never moves beyond a discussion of Util- itarian or Kantian ethics (with appeals to "apply" them to business prob- lems) is doomed to disaster. Finally, the claim that a particular practice may be ethically permissible because "everyone is doing it" is nowhere more common than in business ethics (Green, 1991). This is not necessar- ily because people in business have a lower ethical standard than those in other walks of life, but because business people exist in an artifactual context where institutions are sometimes created by common practice.

The rules concerning proper disclosures and behaviors in negotiations (e.g., revelations about the condition of real estate in a commercial trans- action), for example, often arise out of a history of common practice.

Although never a sufficient condition for ethical justification, the claim that "everybody's doing something" can have some moral force in busi- ness contexts.

A Macrosocial Contract The methodology of social contract is found in a well-respected stream of normative philosophy stretching from Greek origins in Plato's Republic (1968) through the political philosophy of Hobbes (1651/1946), Locke (1690/1948), and Rousseau (1762/1959-1969), and, in the 20th century, John Rawls's (1971) celebrated theory of justice. The method has been applied directly to economic matters in the last decade in the work of theorists such as Donaldson (1982:

36-58), Dunfee (1991), Gauthier (1986), and Keeley (1988). Although each social contract practitioner tends to adjust the method to his or her own purposes, the central idea involves a manipulation of moral variables in the context of a thought experiment 260 Academy of Management Review April designed to ensure procedural fairness in setting the terms of the con- tract. So, for example, in order to ensure impartiality in the selection of principles of justice, John Rawls asks the reader to imagine rational per- sons choosing such principles behind a "veil of ignorance" that blinds the choosers to knowledge of their own characteristics, such as wealth, age, ability, and gender. In turn, choosers are blinded to how to ensure their own particular advantage. The principles that people would choose behind such a veil of ignorance are in this way presumed to be fair (i.e., morally objective and unbiased). In other instances of social-contract rea- soning, fairness is secured simply by including among the contractors all persons whose interests are affected and by requiring consensus in the adoption of the terms of the contract—without the additional device of a veil of ignorance. It is this second strategy that we adopt.

The central social contract question we frame fits within the tradition of social contract thinking. It is focused, however, on principles of eco- nomic morality:

What general principles, if any, would contractors who are aware of the strongly bounded nature of moral ra- tionality in economic affairs choose to govern economic morality?

Let us call the set of principles regarding economic morality to which contractors would agree the macrosociaJ contract.

Moral Free Space Rational contractors would desire the freedom to specify more pre- cisely the norms of economic interaction as a response to the opaque world of strongly bounded moral rationality. Their first reason for doing so is economic efficiency. As has been mentioned, a key feature of bound- edness in economic contexts is uncertainty. Without norms to govern, say, the giving of business-related gifts, the use of intellectual property, and the meaning of verbal commitments, the ensuing uncertainty becomes costly. Consider business negotiation. Negotiation by definition occurs prior to reaching an agreement or contract; it is, in short, a process of attempting to come to, or exploring the possibility of, reaching agree- ment. It occurs among strangers as well as friends and can reflect parties' naked self-interest (Shell, 1991a), yet in order to be efficient, even this suspect and uncertain process must occur against a backdrop of moral norms (Shell, 1991b).

To the extent that negotiating information is system- atically unreliable, the process becomes clumsy and time consuming. Of course, efficiency does not require that all relevant information be dis- closed, or even disclosed accurately. Shrewd negotiators refuse to show all their cards, and they may sometimes bluff about their intentions.

Hence, misinformation in the form of incomplete disclosure can figure in efficient negotiations, but when it does, it is crucial for purposes of effi- ciency that certain rules about possible misinformation be understood by 1994 Donaidson and Dun/ee 261 all parties. In one context, bluffing about intent may be expected, so that the expression "I couldn't take less than .

. ."is not taken at face value. In another context, less than complete disclosure about the subject of ex- change may be expected. Again, it does not follow that there is only one set of efficient ethical rules for all systems of negotiation. If it is clearly understood within the international rice market that bulk rice sellers do not expect to provide an exhaustive list of the rice's defects to purchasing agents, then purchasing agents know either to prod the sellers or to check the rice themselves. In contrast, if international rubber buyers expect sellers to acquire information about defects and then voluntarily to dis- close those defects, they may not check the rubber themselves (Kollack, 1992:

1-29).

In the instance of the rubber market, failure of full disclosure would be unethical, but in the rice market, it would not be. It is important that there be an ethical framework as a background condition for efficient negotiation. There must be some set of ethical rules. In many situations, the particular rules chosen will not matter, because the existence of any reasonable set of rules will reduce uncertainty and enhance efficiency.* The second reason for contractors of the macrosociai contract to re- tain the freedom to specify more precisely norms of economic interaction may be cultural, ideological, or religious. Contractors will wish to main- tain their freedom as groups or communities to make specific interpreta- tions of what bounded moral rationality requires in economic transac- tions.

In some instances this freedom of interpretation will be connected to their desire to maintain their cultural distinctiveness, in other in- stances, it is connected to their desire to reflect their ideological beliefs, and in still other instances, it is connected to their desire to maintain their religious values. Muslim managers may wish to participate in systems of economic ethics compatible with the teachings of Mohammed (Esposito, 1988:

116-202), European and American managers may wish to partici- pate in systems of economic ethics giving due respect to individual lib- erty, and Japanese managers may prefer systems showing respect for the value of the collective (San, 1987). Individual corporations also may have value preferences. IBM traditionally prided itself on a buttoned-down, well-controlled culture, even as Hewlett Packard thrived on creative chaos (Kotter & Heskett, 1992: 58-67).

Both these considerations of the desire (a) to enhance efficiency by reducing uncertainty and (b) to maintain freedom of cultural, ideological, or religious interpretation imply that contractors will choose terms of the macrosociai contract that allow the generation of specific community- level moral norms regulating economic activity. In effect, the contractors in the macrocon tract will adopt a principle allowing the existence of * The norms of behavior evolving out of the marketplace are likely to track preferred economic factors. Thus, societies preferring lowest cost outcomes may place the ethical burden of disclosure on the lowest cost discloser. Societies preferring producer welfare to consumer welfare may prefer to have consumers always incur the obligations of disclosure. 262 Academy of Management Review April community-specific microconfracfs that serve to reduce the moral opaque- ness left by the bounded nature of moral rationality. Thus, the term mi- croconfracfs represents agreements or shared understandings about the moral norms relevant to specific economic interactions. Moreover, we may call the freedom represented by the ability to endorse microsocial contracts moral free space. Thus, by allowing communities or other groups to define moral norms for themselves, the macrocontractors are affirming the existence of moral free space. In turn, the first principle of the macrocontract is:

Local economic communities may specify ethical norms for their members through microsocial contracts.

By the word community, we mean a self-defined, self-circumscribed group of people who interact in the context of shared tasks, values, or goals and who are capable of establishing norms of ethical behavior for themselves.

Consent and Exit Choice entails freedom, and freedom in a community entails the right to leave or exit the community. Choice also entails knowledge, for surely the person who chooses in ignorance cannot be said to choose meaning- fully. "Illusions," as the saying goes, "are not liberties." Hence, because they are rational, macrosocial contract participants will recognize that because people are entitled to be parties to microsocial contracts in spe- cific communities, they must be entitled to exit from those communities, and further that their consent to the microsocial contract is binding only when it is informed. This, in turn, constitutes the second principle of the macrosocial contract, namely:

Norm-specifying microsocial contracts must be grounded in informed consent buttressed by a right of exit.

To illustrate: the right of a labor union or bar association to define ethical principles would, in light of Principle 2, be dependent upon the right of each individual member to quit the union or to resign from the bar asso- ciation.

Consent need not be expressed. Often, engaging in a practice is sufficient to imply consent, as when a person who engages in an auction thereby commits herself or himself to abiding by the rules of the auction.

Consider, again, the issue of compensating employees with nonmonetary benefits. Suppose a manager living in a Third World country is employed by a paternalistic company that provides housing and other personal benefits in lieu of a portion of salary, but which allows employees little choice regarding the kind of housing and benefits offered. The manager, in turn, is required to act in accordance with this practice of paternalism whether he or she personally approves or disapproves. The manager has 1994 Donaldson and Dunfee 263 signaled consent, according to the present theory, through failure to leave the company and seek alternative employment. The manager may, of course, speak out against the ethics of the practice, but so long as he or she fails to exercise the right of exit, he or she is bound ethically to live by the standards in place.^ Coercion invalidates implied consent. An employee subject to inden- tured servitude or commercial slavery lacks freedom and, hence, cannot be inferred to have "consented" to existing norms. Even though coercive restraint of the right of exit is common in political contexts (e.g., in Nazi Germany or in the pre-Peristroika Soviet Union), it is relatively uncommon in commerce. Instances such as the infamous porcelain factories of Ger- many in the 19th century (Bok, 1983: 138-150), the company towns of coal miners in West Virginia (immortalized in Tennessee Ernie Ford's song, "Sixteen Tons" in the refrain, "I owe my soul to the company store"), or the modern brick factories of Pakistan, are increasingly rare. Hard-to-classify cases include those in which physical coercion is not at issue, but in which moral agents nonetheless appear to have no choice. Can poor employees living in areas of extremely high unemployment, with no al- ternate sources of work or food, be said to have "consented" to the terms of their employment through their failure to exit (Nickel, 1987)? Could, for example, a subsistence-level employee in the Third World—where un- employment averages 40 percent—be said to have "consented" to a highly paternalistic compensation system simply through his or her re- fusal to exit? We note, without attempting to resolve, this difficult issue.

Authentic Norms When Principle 2 has been fully satisfied, that is to say, when a microcontract for a given community has been grounded in informed con- sent and buttressed by the right of exit, then we shall call its norms authentic. Again, the term communities includes firms, departments within firms, informal subgroups within departments, national economic organizations, international economic organizations, professional asso- ciations, industries, and so on.

Determining when a business community in fact subscribes to a par- ticular norm is a difficult task. Drawing on related work concerning con- ventions and norms (Lewis, 1969; Pettit, 1990), we suggest the following empirical rules of thumb for identifying authentic norms in particular communities:

A norm (N) constitutes an authentic ethical norm for recurrent situation (S) for members of community (C) if and only if:

Compliance with N in S is approved by most members of C.

^ We use an unsettled issue to emphasize our point.

A noncontentious example would be that of a racially prejudiced manager who personally objects to the norm of equal opportu- nity followed by the firm, but who, nevertheless, is ethically bound to follow the norm. 264 Academy of Management Review April 2.

Deviance from N in S is disapproved by most members of C.

A substantial percentage (well over 50%) of members of C, when encountering S, act in compliance with N.

The existence of authentic ethical norms can be determined by empirical tests of ethical attitudes and behaviors in particular communities. It also sometimes can be confirmed by amassing a significant amount of indirect empirical evidence. The use of empirical research in identifying authen- tic norms is discussed in detail in the final section of this article entitled "Implications for Research." Legitimacy and Hypemorms Yet authenticity, although extremely important, lacks moral author- ity. Were macrocontractors to end their process after formulating these two principles, they would have established a contract endorsing moral free space but lacking any limits. The theory would be reduced to one capable of countenancing any norm affirmed by a group of economic actors. If the securities industry wished to define norms of acceptable communication so that gross puffery, lies, and broken promises were acceptable, no exogenous moral complaints would be relevant. If the association of professional architects wished to declare unethical any attempt by a rival architecture firm to woo a customer away from a com- peting firm (something actually attempted years ago), then no external observer could cry "foul." A view limited to these two principles would be a version of what philosophers call cuiturai ielativism, or in other words, the view that all ethics is reduced to cultural tastes (Brandt, 1983:

40-43).

In business, such relativism would endorse a confusing and corrupt array of incommensurate moral systems and principles. As noted previously, our definition of moral rationality rules out such relativism. Belief in moral rationality presumes minimal objectivity and, in turn, rules out thoroughgoing moral incommensurability among communities. This, as we noted, is not a controversial definition, but it is in step with the con- clusions of virtually every past and present moral theorist. The point is simply that moral free space cannot be unlimited: Macrocontractors will not wish to authorize a moral free-for-all at the microlevel.

The question, then, becomes what principle, if any, macrocontractors would consent to as limiting the "free space" of microcontractors' delib- erations? We may presume that whatever limits the microcontractors' wish to impose would need to be limits that were not microcommuni/y relative. That is to say, they would need to be limits that did not depend upon a particular community's endorsement but applied, rather, to all communities. Using the philosopher Charles Taylor's (1989) expression, they would need to be analogous to hypergoods, or goods sufficiently fundamental to serve as a source of evaluation and criticism of commu- nity-generated norms. Drawing on Taylor's basic concept, let us call the principles that would limit the moral free space of microcontractors hypemorms. 1994 Donaldson and Dun/ee 265 Hypemorms, by definition, entail principles so fundamental to hu- man existence that they serve as a guide in evaluating lower level moral norms. As such, we would expect them to be reflected in a convergence of religious, philosophical, and cultural beliefs, and, indeed, such conver- gence is a handy clue to use in attempting to specify hypemorms. Sub- stantial evidence from a variety of perspectives and sources would be required to establish a hypernorm. We would caution that particular phi- losophies or evidence of widespread practices or attitudes cannot be pro- jected, ipso facto, into hypemorms. The moral philosophy of the Marquis de Sade or the broad acceptance of slavery in the ancient world are cases in point.

The search for hypemorms is basically a search to validate state- ments such as Taylor's (1989:

64) that "many accept as their highest good ... a notion of universal justice and/or benevolence," and Walzer's (1992:

9) that "perhaps the end product of this effort will be a set of standards to which all societies can be held—negative injunctions, most likely, rules against murder, deceit, torture, oppression, and tyranny." Hypemorms do not settle the question of whether Utilitarianism, Kantian Deontology, or Aristotelian Eudiamonism is the best theory, but rather provide room for and presume support from any or all acceptable theories of morality.

Hence, for example, contractors would not permit microsocial con- tracts, even when produced under conditions of unanimous consent, that condoned murder as a method of enforcing contracts, nor would they tolerate subjecting employees to physical coercion. This constitutes the third principle to which macrocontractors would agree, namely:

In order to be obligatory, a microsocial contract norm must be compatible with hypemorms.

Practically speaking, how are people to isolate and identify hypemorms?

We do not take a position concerning whether hypemorms have a purely rational basis, as Kant argued (Kant, 1788/1956), or a partly empirical and historical basis, as Hegel argued (Hegel, 1807/1977), nor do we think re- solving such a venerable and fundamental epistemological question is necessary to the process of identifying hypemorms. We propose to use the existence of the convergence of religious, cultural, and philosophical be- liefs around certain core principles merely as a ciue to the identification of hypemorms. For even if hypemorms could be certified solely through the light of reason, we should expect to encounter patterns of the accep- tance of hypemorms among people around the world. Hence, patterns of religious, cultural, and philosophical belief can serve as a clue, even if not as total validation, for the identification of hypemorms.

Interestingly enough, a consensus appears to be growing among scholars that such a convergence exists. Anthropologists, political scien- tists, and philosophers continue to articulate principles of global rele- vance. Even though they speak with something less than a univocal 266 Academy of Management Review April voice, their concepts reflect a broad commonality of opinion. Clyde Kluck- horn, anthropologist, identified a uniformity of needs and psychic mech- anisms among all humans (1955: 673). Political scientist Terry Nardin identified a core list of moral notions undergirding international law, including: legal equality among states, the right to national self-defense, the duties to observe treaties and to respect human rights, the concepts of state sovereignty and nonintervention, and the duty to cooperate in the peaceful settlement of disputes (1983:

233). International theorist Ethan Nadelmann identified specific activities that are globally proscribed, among which are "piracy, slavery, trafficking in slaves, counterfeiting of national currencies, hijacking of aircraft, trafficking in women and chil- dren for purposes of prostitution, and trafficking in controlled psychoac- tive substances" (1990:479).

Business theorist William Frederick identified a series of normative corporate guidelines that emerged from a careful analysis of six intergovernmental compacts (including, e.g., the "OECD Guidelines for Multinational Enterprises," the "Helsinki Final Act," and the "ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy"). In this synthesis of international corpo- rate norms, Frederick develops a wide array of principles, including:

MNCs should adopt adequate health and safety stan- dards for employees and grant them the right to know about job-related health hazards.

MNCs should respect the rights of all persons to life, liberty, security of person, and privacy.

MNCs should control specific operations that contribute to pollution of air, water, and soils. (Frederick, 1991:

166-167) Lee Preston and Duane Windsor (1991) have identified these and other emerging sets of global norms and subsumed them all under the label of international public policy. In Japan, the Institute of Moralogy has sought to define transcultural morality in the context of five universally applica- ble principles. These are: self-renunciation, realization of benevolence, precedence of duty over personal rights, respect for ortholinons (benefac- tors who contributed to the development and happiness of humankind), and enlightment/salvation. Other groups, such as the United Nations Commission on Transnational Corporations and the International Orga- nization of Securities Commissions, have engaged in quests to define key principles of ethical behavior in business which transcend the biases of localized perspectives.^ The best accepted and most widely promulgated candidates for uni- versal norms today are those cast in the language of rights. Many theo- ^ The basis for attributing universal responsibilities to multinational corporations var- ies.

For example. Manuel Velasquez (1992) has argued that even the rational pursuit of its self-interest by a multinational corporation entails accepting specific moral responsibilities. 1994 DonaJdson and Dun/ee 267 rists treat rights as hypemorms. Henry Shue, in his book, Basic Rights, articulated a list of four basic rights, including the right to subsistence and the freedom of physical movement, security, and political participa- tion. For Shue, a basic right is one so important that its deprivation, "is one standard threat to rights generally" (Shue, 1980:

34).

Donaldson (1989:

65-94) argued that on the basis of three accepted rights-generating crite- ria a list of 10 fundamental international rights can be construed.' In England, the international political theorist, R. J. Vincent, argued persua- sively that a single cosmopolitan culture is emerging worldwide "which is spread across all indigenous cultures, and which carries to each of them what are, in some at least geographical sense, global human rights" (Vincent, 1986: 50). Perhaps the best known international rights document is the Universal Declaration of Human Rights (1948). Endorsed by virtually every nation in the world, this document specifies over 20 principles that secure rights for all nations. We agree with Walzer (1992:

9) that although a "moral equivalent of Esperanto is probably impossi- ble," the vocabulary of rights "is not a bad way of talking about injuries and wrongs that no one should have to endure." The idiom may vary when the concepts are expressed in the terminology of duty-oriented philoso- phies (as much of Eastern philosophy is), but the basic ideas remain the same (Tomasi, 1991).

The task of identifying and interpreting a comprehensive list of hy- pemorms is immense and falls well beyond the scope of this article.

Furthermore, the task is an open-ended one because no criterion exists for determining when a proposed list of hypemorms is complete. In fact, it seems quite plausible that our understanding of hypemorms can change over time so that any list will continuously evolve. For present purposes we assume only that some hypemorms exist and that an initial list of hypemorms should include, at a minimum, the following two concepts:

Core human rights, including those to personal free- dom, physical security and well-being, political partic- ipation, informed consent, the ownership of property, the right to subsistence; and The obligation to respect the dignity of each human per- son.^ ' These rights are to freedom of physical movement, ownership of property, freedom from torture, a fair trial, nondiscriminatory treatment (i.e., freedom from discrimination on the basis of such characteristics as race or sex), physical security, freedom of speech and association, minimal education, political participation, and subsistence (Donaldson, 1989:

81).

' There is substantial support for this initial list of hypemorms. For example, the pro- posed text of the draft United Nations Code of Conduct of Transnational Corporations pro- vides in paragraph 14 that "Transnational corporations shall respect human rights and fundamental freedoms in the countries in which they operate. In their social and industrial relations, transnational corporations shall not discriminate on the basis of race, color, sex, religion . . ." (United Nations, 1990). 268 Academy of Management Review April To understand how even an authentic norm (i.e., one passing Princi- ples 1 and 2) could fail to be obligatory because it failed Principle 3 (i.e., the hypernorm test) consider again gift giving in business. It is well known that ethical custom varies widely from culture to culture on the propriety of gifts (Lane & Simpson, 1984: 35-42). In some cultures, busi- ness gift giving is mandatory; in others it is routinely condemned. Inte- grative social contracts theory stops short of requiring that all cultures establish the same ethical norms regarding gift giving: Macrocontractors agree that cultures may define the limits on such practices for them- selves. But, again, they may do so only up to a point, because at some point the practice will come in conflict with norms valid in all business contexts (i.e., hypemorms). To take an extreme case, imagine a business culture in a mature democratic society that condoned the systemic prac- tice of making judgment-warping gifts to elected government officials.

Imagine, in other words, a business culture systematically condoning the kind of bribe represented by Lockheed's $13 million payment to Japanese Prime Minister Tanaka in the 1970s. Such a bribe, representing a distor- tion of democratic process and the undermining of the trust of a publicly elected official, can be seen to violate the fundamental right to political participation (Donaldson, 1989: 88-89) and, hence, to fail the hypernorm test. A business community, whether industry centered, nation centered, or corporation centered, endorsing such a practice, would be endorsing an authentic but nonobligatory norm.

Priority Rules Finally, world-level rational contractors, recognizing both their strongly bounded rationality and the frequency of conflicts occurring among norms in various economic communities, would want a means to arbitrate and resolve such conflicts. Sometimes conflicts will be easy to resolve because the norm that conflicts with one's own community norm will also conflict with a hypernorm. For example, if a German company were asked by Iraq to sell equipment for the production of biological weapons, the conflict between its abhorrence of biological weapons and Iraq's tolerance of them is easily resolved if one believes that biological weapons violate a hypernorm proscribing the indiscriminate killing of the innocent. At other times the resolution will be more difficult, especially in instances where conflict occurs between two legitimate norms emanating from two separate communities. For example, in Jamshedpur, India, the Tata Steel Company has for years guaranteed employees that it will pro- vide a job at the Tata Company to at least one of the employee's children.

This practice is extremely popular among Tata workers, as it also is among members of the Jamshedpur business community. The practice does not obviously conflict with any hypernorm; nonetheless, it would be regarded as nepotistic in many Western countries. Would it be permissi- ble, then, for a Western company with a subsidiary in Jamshedpur to replicate the job guarantees of the Tata company? 1994 DonaJdson and Dunfee 269 Clearly, the design of any priority rules for arbitrating such conflicts must reflect and be consistent with the terms of the macrosocial contract.

The macrocontract emphasizes the freedom of individual communities to develop ethical norms. For this reason, attention should be given to norms that do not adversely have an impact on the freedom of other economic communities to create and support their own norms.

In contrast, when norms have an impact solely within their community of origin (i.e., when they have no impact on outsiders) they should, ceteris paribus, be allowed to stand, even in instances where they are inconsistent with the norms of other communities.

If the rules of a public auction are different in New Zealand from Lithuania, the Lithuanian manager should follow New Zealand auction norms so long as doing so has consequences en- tirely confined to New Zealand.

Sometimes economic communities anticipate the possibility of con- flict with the norms of other communities and in response develop formal preference rules for their members to follow in cross-cultural transac- tions.

The Foreign Corrupt Practices Act (FCPA) in the United States is an example. Assuming that the FCPA constitutes an authentic norm for the United States (a proposition that some people would challenge), it thereby represents a local community-based standard for resolving conflicts be- tween U.S. norms and another country's norms of bribery. But suppose that another country has a local norm of preference inconsistent with the principles of the FCPA. In this circumstance, there is a need for an over- arching set of priority rules to determine which local preference rule should dominate in a cross-cultural transaction.

Thus, the fourth and final principle of the macrosocial contract is as follows:

In case of conflicts among norms satisfying Principles 1-3, priority must be established through the applica- tion of rules consistent with the spirit and letter of the macrosocial contract.

Although many alternatives could be followed in developing priority rules (Dunfee, 1991:

43-44), the following six principles seem consistent with the spirit and letter of the macrosocial contract. They are meant not as theoretically precise principles but as rules of thumb.

Transactions solely within a single community, which do not have significant adverse effects on other humans or communities, should be governed by the host community's norms.

Community norms indicating a preference for how conflict-of-norms situations should be resolved should be applied, so long as they do not have significant adverse effects on other humans or communities.

The more extensive or more global the community which is the source of the norm, the greater the priority which should be given to the norm.

Norms essential to the maintenance of the economic environment in which the transaction occurs should have priority over norms potentially damaging to that environment.

Where multiple conflicting norms are involved, patterns of consistency among the alternative norms provide a basis for prioritization. 270 Academy of Management Review April 6. Well-defined norms should ordinarily have priority over more general, less precise norms.

For purposes of illustration, let us return to the hypothetical case of a Western company's subsidiary in India considering adopting the practice of guaranteeing employment for the children of existing workers. In this case, some of the priority rules are inappropriate. Rules 2, 4, and 6, which speak to the issues of existing local community preference rules, the maintenance of the economic environment, and the degree of precision of definition in the norm, have no direct relevance to the issue. On the other hand. Rules 1, 3, and 5 have some, albeit limited, relevance. In particular.

Rules 3 and 5 may appear to speak against following the Indian practice insofar as the norms against nepotism seem both more broadly accepted and more consistent with other norms (such as the norm favoring quali- fications as a decisive criterion in hiring).

However, if two key points were established, these rules lose their relevance and another (Rule 1) would be invoked. Suppose, for example, it could be shown that the practice of promising employment is consistent with other widely held moral beliefs.

Suppose it were demonstrated that the very principle supporting the con- cept of private property—which allows, among other things, the son of a rich property owner to benefit by receiving a large money inheritance, or even a job, from his parent—is the same principle at stake when an employee receives (as a part of his compensation) the guarantee of a job for his child. Suppose also that it could be shown that virtually no impact will occur for persons outside the Jamshedpur economic community (such as for better qualified potential job applicants) and that, in turn, priority Rule 1 applied. If such points were established, the priority rules would endorse the permissibility of the practice for the Western company's sub- sidiary in India.

As the example makes evident, the six priority rules have a ceteris paribus condition and must be weighed and applied in combination. The proposed priority rules find significant support in the jurisprudence of conflicts of law principles. As is true of the process of statutory interpre- tation, the application of the priority rules should eschew a precise hier- archy for the six rules and, instead, emphasize factors such as the fit of the particular ethical decision with one or two of the principles or with a convergence of the rules toward a particular result.

To summarize, the general principles that contractors, aware of the strongly bounded nature of moral rationality in economic affairs, would choose and which therefore define the macrosociai contract of economic morality, are:

Local economic communities may specify ethical norms for their members through microsocial contracts.

Norm-specifying microsocial contracts must be grounded in informed consent buttressed by a right of exit.

In order to be obligatory, a microsocial contract norm must be compatible with hypemorms. 1994 Donaldson and Dunfee 271 4.

In case of conflicts among norms satisfying Principles 1-3, priority must be established through the application of rules consistent with the spirit and letter of the macrosocial contract. (See also Donaldson & Dunfee, 1993.) When a norm has been generated by a community in accordance with Principles 1 and 2 (thereby constituting an authentic norm) and then sat- isfies the requirements of Principle 3, we refer to it as a iegifimafe norm.

Subject to the application of the priority rules, legitimate norms are mor- ally binding for members of the norm-generating community.

IMPLICATIONS FOR RESEARCH ISCT is replete with empirical and theoretical research implications.

Initially, there is the core question of whether the assumptions of the macrosocial contract are consistent with current social belief and prac- tice.

Even though ISCT is offered as purely a normative theory, and there- fore does not require descriptive validation, a variety of interesting re- search questions exists concerning its acceptance in the real world.

ISCT is dependent upon background empirical findings to help it render specific normative judgments about particular cases. For exam- ple, the attitudinal and behavioral elements of the authenticity test must be empirically established. Empirical work also may be necessary to apply the priority rules in cases involving clashing authentic norms. In addition, there are a host of background issues raised by ISCT, including the precise nature and source of hypemorms, how these norms may be identified with precision, whether these norms may evolve or instead are unchanging, whether the priority rules should be themselves prioritized, and so on.

In this section we briefly highlight the research implications of ISCT and note how it provides a lens through which existing empirical re- search can be evaluated for its normative implications. ISCT represents an opportunity for empirical researchers to provide business ethics deci- sion making with much needed substance and context. The contractarian foundation of ISCT provides a theoretical mortar for normative structures for business ethics built upon the bricks and stones put in place by em- piricist artisans. In order to provide normative guidance in this context, empirical research must be consistent with the assumptions and defini- tions of ISCT.^ A. Research Issues Conceming the Descriptive Validity of ISCT ISCT is presented as a normative theory. It is responsive to the ulti- mate questions: "By what criterion?" or "Says who?" in judging whether a ^ There is an enormous published literature of empirical work in business ethics. For the most comprehensive summaries and critiques of this extensive body of empirical literature, see Randall and Gibson (1990), Tsalikis and Fritzsche (1989), and Weber (1992). The quality of the research has been subjected to considerable criticism particularly due to recurring failure to employ a theoretical foundation or to use testable hypotheses. 272 Academy of Management Review April given action is right or wrong. ISCT is not intended to represent the sole source of ethical obligation for societies generally, or even for business managers in all contexts. Instead, ISCT is offered as a useful, pragmatic, communitarian-based theoretical framework setting forth a process for making certain normative judgments in business ethics.

As a normative theory, ISCT is not set forth as necessarily descriptive of current reality. However, some researchers may wish to raise the issue of whether, and to what extent, people act in accordance with the proce- dural norms of ISCT.'° Doing so would involve ascertaining the extent to which individuals think that a macrosocial contract exists along the gen- eral lines suggested by ISCT and the extent to which they recognize and act upon community-based contractual/promissory obligations in their normative judgments in business.

The extent of acceptance of ISCT could be tested in part by adapting from the eight-item multidimensional scale proposed by Reidenbach and Robin (1990) as a means for measuring the ethical decision-making pro- cess of individuals. Two of the items in the scale are explicitly contrac- tual: violates/does not violate an unspoken promise, violates/does not violate an unwritten contract.

To the extent that these factors help explain beliefs among members of a recognized community concerning whether practices are ethical, they support the claims of ISCT. Interestingly, in their test of the scale, Reidenbach and Robin retained the contractarian factors while purging references to utilitarianism and egoism. They ex- plained this by noting that "in debriefing analyses it was obvious that respondents had a difficult time in understanding and applying the con- cepts inherent in utilitarian thinking" (1990:

647).

If individuals intuitively understand that they confront obligatory, yet implicit contractual obliga- tions as a result of membership in communities, then there is some sup- port for the acceptance of ISCT. This is particularly the case if they find these concepts more meaningful and useful than utilitarianism.

Research Issues Pertaining to the Empirical Dimensions of ISCT The primary intersection between ISCT as a framework for making normative judgments and empirical research in business ethics concerns the identification and specification of ethical norms at the community level, designated as aufhenfic norms. The claim that community ethical norms can be identified with some precision is consistent with similar claims in reference to business norms more generally (Thomas & Soldow, 1988).

Empirical research will also be required to apply the priority rules in certain contexts. Priority-rule issues such as whether or not par- '° Some empirical testing of general ethical theories has already been initiated. For example, Greenberg and Bies (1992) review some of the core assumptions of utilitarianism against the existing empirical literature on organizational justice. 1994 Donaldson and Dunfee 273 ticular norms may have significant adverse effects on other humans or communities or may be damaging to a particular transaction environment will often require empirical analysis. Finally, empirical research may constitute one method for parsing out the parameters of the limiting hy- pemorms of ISCT.

Bl. Definition of an ISCT-Relevant Community A key issue under ISCT is delineation of the boundaries of a commu- nity in which a particular norm may be considered obligatory. ISCT de- fines community as a self-defined, self-circumscribed group of people who interact in the context of shared tasks, values, or goals and who are capable of establishing norms of ethical behavior for themselves. Impor- tantly, a particular business practice may have an impact on multiple communities, so that the process of judging the rightness/wrongness of the practice may require identification of several community-based norms. The need to consider the norms of several discrete communities is particularly likely in evaluating global business practices.

Practically, how are the boundaries of communities to be deter- mined? Reference to formal groupings or structures such as corporations, departments, trade associations, generally recognized business func- tions, and professional bodies may serve as a starting point for identify- ing relevant communities. Thus, employees of a specific drug company, corporate attorneys, attorneys generally, and consumers of dialysis equipment may be relevant communities in determining whether it is appropriate to fire a corporate attorney who disclosed information to gov- ernment officials about defective dialysis equipment being sold by the company." Identification of a community may be supported by a group- awareness test whereby members of the putative community recognize their association with the group and view it as a source of obligatory ethical norms. Once the rough boundaries of the community(ies) are de- termined, then standard sampling techniques can be employed to obtain ISCT-relevant information representative of the population of the commu- nity as a whole.

Convenience samples, particularly those using students, may fail to provide an adequate context for obtaining representative attitudes and behaviors of ISCT-relevant communities. Students may not identify with the communities to which their attitudes are being projected, and, most important, they may lack knowledge concerning the extant norms in those communities. Thus, student samples would appear to have limited value in the context of ISCT, relevant only to issues within the community of students (e.g., cheating) (McCabe, Dukerich, & Dutton, 1991) or to the " See Baia v. Gambio. 584 N.E. 2d., 104 (111.

Sup. Ct. 1991). 274 Academy of Management Review April circumstance, probably quite limited, in which their views may be pro- jected fairly as representative of business or the nation as a whole, in a context in which such broadly defined communities may be considered relevant. Similarly, where norms vary across industries, a sample taken of marketing managers generally may not provide adequate insights re- garding the substance of professional norms, such as those pertaining to whether or not an agent should disclose that his or her commission rate varies among the supplies she or he can recommend. Marketing manag- ers working for travel agencies may be responding to quite different com- munity norms conceming commission disclosures than those working for financial consulting firms. Large samples of salespeople, which cross many different business communities, may produce opaque outcomes concerning projected behaviors or normative judgments due to the diver- sity of context which the respondents bring to otherwise very carefully crafted projective vignettes (Robertson & Anderson, In press).

The selection of the community(ies) most relevant to a particular nor- mative judgment is critically important and will influence the types of authentic norms that are recognized. For example, it may be asserted that "bribery is endemic to nation X." However, it may turn out that accepting bribes is authentic only to a small group of bribe-taking government of- ficials within nation X, whereas the larger business and social commu- nities of nation X reject the practice. This would explain why bribery is generally conducted in secrecy and would render inappropriate the claim that bribery is endemic to nation X.'^ The search for relevant communities required in applying ISCT should often produce a more accurate under- standing of the scope of actual practice and, as a consequence, result in fairer ethical judgments.

B2.

Identifying ISCT-Relevant Ethical Attitudes Authentic norms are evidenced in part by the uncoerced, genuine attitudes of the community membership concerning the rightness/ wrongness of a particular standard of behavior. The focus of the attitudi- nal research in ISCT is on individuals' perceptions concerning the exis- tence of ethically appropriate and obligatory norms or rules in their com- munities.

The authenticity test under ISCT concerns attitudes about norms of "^ In this case of conflicting norms, assuming that none of the norms violate hyper- norms, the ultimate normative judgment would depend on the operation of the priority rules.

Consider a case where a Dutch corporation is asked to pay a bribe to government officials in Indonesia. Assume that "bribe taking is o.k." is an authentic norm among the Indonesian government officials and that "bribe taking is wrong" is an authentic norm among the broader Indonesian business community and for the Dutch corporation. In such a circum- stance, under the priority rules, the norm of "bribe taking is wrong" would dominate, and payment of the bribe would be found to be unethical under ISCT. 1994 DonaJdson and Dunfee 275 appropriate behavior in the community. This requirement is distinct from the projected behaviors of the community members, or their estimates of existing behavior patterns in the community. Assumptions concerning extant behavior are not sufficient because the existing behaviors may be viewed as neutral or even as immoral by members of the community and therefore could not serve as the basis for authentic ethical norms.

Care must be used in measuring ISCT-relevant attitudes. In stressing the assumption of bounded moral rationality in business affairs, we em- phasize that individuals may only be capable of knowing their genuine moral preferences when confronted with the full environment of a deci- sion. Generic values-based approaches, or broad-based noncontextual inquiries (e.g., asking respondents whether they agree that "a corpora- tion's primary responsibility is to stockholders" [Monippallil, Kathawala, Hattwick, Wall, & Shin, 1990]) would have limited value under ISCT. In contrast, research based on detailed, context-rich scenarios or vignettes requiring subjects to respond to precisely delineated dilemmas is more consistent with the requirements of ISCT. (See, e.g., Akaah & Riordan, 1989, and Norris & Gifford, 1988.) If they have properly defined communi- ties and focused questions of belief, researchers may be able to avoid the confounding results often obtained in prior empirical work.^^ B3.

Identifying ISCT-Relevant Ethical Behaviors Once it is determined that most members of a given community agree about the rightness/wrongness dimension of a particular norm, it is then necessary to determine whether sufficient compliance exists within the community to constitute the putative norm as authentic. Although studies of actual behaviors would be direct evidence, they are notoriously diffi- cult, particularly in the domain of deviant behavior. It is not surprising, therefore, that the dominant research paradigm to date "proceeds mainly from the cognitive component to inferred behavior" (Frederick, 1992: 93).

The central question under ISCT is determining actual behaviors of the community members. In many studies, researchers ask respondents to project how they would act in a given context. These studies that ask respondents to estimate how others behave are valid for ISCT purposes only if they constitute accurate representations of community behaviors.

Projected behaviors may be problematic. This is an important dimension of the ISCT foundational assumption of bounded moral rationality. Ethi- cal behavior in business may invoke ardent emotional responses (Jones & Verstegen, 1992), making it difficult for an individual to predict accurately how he or she would respond. As dramatized by Crane's The Red Badge '^ Hunt, Wood, and Chonko have noted that one somewhat defeatist reaction to the confusing pattern of results has been that "researchers frequently have been encouraged to measure the broad principles underlying ethical values rather than the domain-specific ethical issues" (1989:

82). 276 Academy of Management Review April of Courage, in ethics as in war, one may never know how one will react until one is on the spot.

The relationship between projected behaviors and actual behaviors is critical for ISCT usage. Any means that is used to infer behavior must be an accurate indicator of actual behaviors. Empirically tested constructs such as Fishbein's and Ajzen's (1975) theory of reasoned action (see Randall, 1989) suggest that there is a close relationship between intention and action and that intention is influenced by attitudes toward the behavior and recognition of subjective norms (Dunfee & Robertson, 1984).

Such theories may lead to the establishment of valid proxies of behavior relevant to the test of authenticity under ISCT.

In attempting to ascertain community behaviors through surveys based upon self-reporting, the long-standing, thorny problem of respon- dents giving socially desirable answers or acting to be "good" interview subjects must be considered (Fernandes & Randall, 1992).^* When deviant behaviors are at issue, individuals may be suspicious of claims of confi- dentiality or nontraceability and they may, for a variety of reasons, fail to accurately report their own behaviors. Methodologies such as the ran- domized response technique have been advocated (Dalton & Metzger, 1992) as a means of mitigating bias.'^ Although some research has fo- cused on the reasons given by managers in support of projected behav- iors, the forms of reasoning used within communities for the adoption of norms do not directly influence the determination of authentic norms un- der ISCT. Communities are entitled to adopt their own processes for the generation of norms; they are not limited to particular "correct" forms of reasoning. The reasoning used may be important in one sense external to the normative judgment process of ISCT. If one seeks to bring about changes in norms within a community, then knowledge about the reason- ing favored within a community is critical. ISCT recognizes that norms will constantly change at the community level and that members will exercise voice and exit in response to the evolution of norms.

B4.

Priority Rules, Hypemorms, and International Dimensions of ISCT In cases where multiple community norms in opposition to each other survive the hypernorm test, the process of normative judgment will re- " There could even be a related phenomenon, a social norm denial bias, concerning the attitudinal requirement of authentic norms. Subjects might misrepresent their attitude about whether a certain community norm exists because they know their own behavior does not measure up to that standard.

'^ Dalton and Metzger (1992) provide examples of the use of unrelated questions in which respondents are asked to flip a coin and then to answer questions truthfully only if the coin is "heads," or to answer truthfully only if their last phone digit is an even number. All others are to answer each question "no" or in some other mandatory manner. The results are adjusted statistically for the probability associated with the unrelated question. 1994 ' L ^ Donaldson and Dunfee 277 quire application of the priority rules. This is likely to be a common oc- currence in the normative judgment process of ISCT.

The priority rules are a critical feature of ISCT.

Several of the priority rules require estimates of the impact of contemplated actions which may require empirical analy- sis.

Aspects of the priority rules requiring empirical elaboration include whether or not a questioned transaction may have an impact outside of the community in which the action occurs (Rules 1 and 2) and whether a norm is essential to the maintenance of the transaction environment, or to the contrary, is likely to be damaging to that environment. In addition, the suggested priority rules require determination of the existence of commu- nity norms indicating local preferences for resolving priority (Rule 2).

Even though these often may be reflected in law or formal codes, as is the case of the example of the Foreign Corrupt Practices Act, they also may be found in more informal norms.

As explained earlier, we would expect genuine hypernorms to be reflected at the convergence of global beliefs and, as such, observable indirectly through empirical research. Skeptics may note the failure of the U.N. Commission on Transnational Corporations to obtain a consensus concerning a U.N.-sponsored code of behavior and the limited impact of The Guidelines for Multinational Enterprises adopted by the OECD coun- tries in 1976. Nonetheless, as we documented previously, a substantial search is under way to identify universal norms. Empirical research can contribute to this search by focusing on representative samples of inter- national communities and seeking to identify areas of convergence of belief concerning universal standards so fundamental to humanity that they cannot be abrogated by local communities. Hypernorms may be ei- ther negative or affirmative in nature. Many hypemorms would be neg- ative prohibitions, similar in nature to the global prohibition regimes identified by Nadelmann (1990), which prohibit or restrict certain prac- tices.

Others would impose affirmative obligations either to act in a certain manner (taking certain active steps to protect human health or protect the physical environment) or would impose duties upon those undertaking certain activities (drug manufacturers must restrict sales to those not competent to use the product safely).

We stress the particular relevance of ISCT for global business ethics.

Research comparing business practices among different countries can provide a basis for the application of ISCT by identifying authentic norms for different international communities. Once that is done accurately, the framework of ISCT can be used to sort out, through the application of priority rules and hypernorms, the relative importance of the various norms in a particular boundary-spanning transaction.

Implications for Theoretical Research Extending ISCT The basic summary of ISCT still leaves many questions to be resolved at the theoretical level. For example, the concept of hypernorms encom- 278 Academy of Management Review April passes many as yet unresolved issues. We expect that a great deal of work will be required to develop a prima facie list of hypernorms capable of serving as the basis for extended theoretical scrutiny. Implicit within this question is the issue of selection of the best methodologies for iden- tifying hypernorms. Is it sufficient as a first step to look for convergence among the reports of scholars seeking convergence? Are global surveys of values, attitudes, and beliefs appropriate for providing clues as to the nature of specific hypernorms? If so, are they scientifically feasible? If convergence can serve as a clue to the nature of hypernorms, then how much convergence should be required?

Again, we explicitly leave open the question of the epistemological nature of hypernorms. Are they primarily rational, or instead empirical, or some hybrid of the two? Can they evolve over time, or are they set in some natural law sense?

Similar questions may be raised concerning other aspects of ISCT.

Should the priority rules themselves be prioritized, or is it better to leave them to a more open-ended process of application? We argue that they all derive directly from the assumptions of the macrosocial contract. But are those arguments sufficient? Are there additional priority rules that should be added to the list?

How relativistic is ISCT? In our judgment, commentators tend to over- emphasize the role of moral free space in characterizing ISCT.

As argued elsewhere, the seemingly relativistic nature of this moral free space is limited in three distinct ways by the terms of the macrosocial contract:

first, through a requirement of consent at the level of the microsocial contracts; second, through the application of independently authoritative hypernorms; and, third, through the operation of a set of priority rules designed to determine which norms generated by communities become obligatory in cases of directly conflicting norms.

Finally, there are many questions concerning how these concepts might be translated for managers. Can, for example, the foundational assumptions and implications of ISCT be reduced to a meaningful set of rule-of-thumb principles capable of providing realistic guidance for man- agers? Ultimately, what are the most effective ways of translating these ideas for managers?

An enormous research agenda, both empirical and theoretical, is generated by the basic conceptual framework of integrative social con- tracts theory.

CONCLUSION The tension between empirically based and normatively based meth- ods currently frustrating business ethics research will persist.

^^ Nonethe- '^ A special symposium on the possibility of reconciling normative and empirical meth- odologies, entitled "An Integrated Business Ethics: Multiple Perspectives." was convened at 1994 Donaidson and Dun/ee 279 less, in this article we hope we have shown that an ISCT is capable of providing a schema that allows both normative and empirical factors to harmonize. The theory we have defended does not presume to eradicate differences between the "is" and the "ought." It also does not presume to pull normative rabbits from empirical hats and to derive prescription from description. Yet it establishes a means for displaying the ethical rele- vance of existing norms in industries, corporations, and other economic communities, even as it limits the acceptable range of such norms. It attempts to reach beyond the generality of Kantian Deontology and Util- itarianism to allow a more detailed normative assessment of particular ethical problems in economic life—in a world of transactions that we have shown to be peculiarly susceptible to bounded moral rationality.

Finally, by revealing the normative relevance of existing cultural and economic norms, the theory identifies pockets of inadequacy in existing empirical business ethics research. In this way, as we previously ex- plained, the theory entails an agenda for empirical research. It is an agenda that authorizes the search for authentic ethical norms in indus- tries, corporations, alliances, and regional economic systems. It is an agenda that advocates much closer scrutiny of existing ethical beliefs and practices in institutions as dissimilar as the EC, the Sony Corpora- tion, the international rubber market, and Muslim banking. Notably, it is an agenda that emphasizes more than any other contemporary theory the ethical import of empirical research.

For this reason, ISCT will no doubt provoke cries of "ethical relativ- ism" from some quarters, but, as we have taken pains to explain, the theory not only sanctions moral free space for economic communities, it also establishes unequivocal boundaries on free space. The claim that moral free space, though limited, nonetheless exists is unremarkable.

The belief that ethical problems in business can be resolved entirely without appeal to the shared convictions of living people has never been popular among anyone except modern ethical theoreticians.

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Thomas Donaldson is the John F. Connelly Professor in the School of Business, Georgetown University, where he also holds appointments in the Department of Philosophy and the Kennedy Institute for Ethics. He received his Ph.D. in philosophy 284 Academy of Management Review April from the University of Kansas. His current research focuses on the intersection be- tween social contract and stakeholder theories, especially in the context of interna- tional business.

Thomas W. Duniee received the J.D, and L.L.M. degrees from the New York Univer- sity School of Law. He is the Joseph Kolodny Professor of Social Responsibility in Business at the Wharton School. University of Pennsylvania. His current research interests focus on social contract theory and business ethics and on developing ethical standards for business transactions.