Justice and Corporate Governance: New Insights from Rawlsian Social Contract and Sen’s Capabilities Approach

By considering what we identify as a problem inherent in the ‘nature of the firm’—the risk of abuse of authority—we propound the conception of a social contract theory of the firm which is truly Rawlsian in its inspiration. Hence, we link the social contract theory of the firm (justice at firm’s level) with the general theory of justice (justice at society’s level). Through this path, we enter the debate about whether firms can be part of Rawlsian theory of justice showing that corporate governance principles enter the “basic structure.” Finally, we concur with Sen’s aim to broaden the realm of social justice beyond what he calls the ‘transcendental institutional perfectionism’ of Rawls’ theory. We maintain the contractarian approach to justice but introduce Sen’s capability concept as an element of the constitutional and post-constitutional contract model of institutions with special reference to corporate governance. Accordingly, rights over primary goods and capabilities are (constitutionally) granted by the basic institutions of society, but many capabilities have to be turned into the functionings of many stakeholders through the operation of firms understood as post-constitutional institutional domains. The constitutional contract on the distribution of primary goods and capabilities should then shape the principles of corporate governance so that at post-constitutional level anyone may achieve her/his functionings in the corporate domain by exercising such capabilities. In the absence of such a condition, post-constitutional contracts would distort the process that descends from constitutional rights and capabilities toward social outcomes

An examination of the impact of executive compensation disparity on corporate social performance

We investigate the relationship between top management team compensation disparity and corporate social performance. We argue that pay structures with high disparity are reflective of transactional, individualistic organizations that foster a shareholder orientation. In contrast, pay structures with low disparity are indicative of relational, cooperative organizations that foster a stakeholder orientation. Examining the effect of these attributes on corporate social performance, we find that corporate social performance is higher in low pay disparity firms than in high pay disparity firms. We discuss our contributions to executive compensation and corporate social performance research and suggest directions for future research