The Political Obligations of Corporations:
Justifying A Role for the State in Enforcing Accountability

Carol A. Tilt* and Gillian S.F. Lubansky**

* Lecturer in Accounting, School of Commerce, Flinders University, South Australia

** Tutor in Philosophy, School of Philosophy, La Trobe University, Victoria

Correspondence should be addressed to:

Dr Carol A. Tilt

School of Commerce

Flinders University

GPO Box 2100

Adelaide SA 5001

Ph (08) 8201 3892

Fax: (08) 8201 2644

Email:

The authors wish to thank Laurence Lester and Nicholas Mangos for their helpful comments. All errors are the responsibility of the authors.

Accountability and Corporations’ Political Obligation:
Justifying A Role for the State in Enforcing the Social Contract

Abstract

Many papers written about social and environmental accounting and reporting discuss the accountability aspect of public disclosure. Within these discussions there is an implicit assumption that there exists a social contract between society and business. Some papers explicitly acknowledge its existence, but few attempt to investigate the notion in any detail. Those that do, appear to rely on a change occurring in the attitude of corporations to the social environment. This paper considers this unlikely, and that the state must play a role in ensuring the accountability of organisations. It examines corporations’ political obligation and where it lies, relying on the notion of fairness. The paper supports the case for requiring the state to regulate social reporting. It concludes that arguments for greater corporate disclosure based on duties or rights may be stronger if they are used justify the political obligation of corporations to obey the state, rather than waiting for a change in corporate conscience.

Keywords: Political Obligation; Fairness Theory; Social Contract; Social and Environmental Accounting; The State.

Introduction

Over ten years ago, Gray et al. (1988) provided the first paper where accountability and the social contract were investigated as part of a theory for corporate social reporting (CSR). Since then, many papers have implicitly and explicitly acknowledged the existence of a contract between society and business, but do little more than use its presence as justification for social reporting without reference to its complexities or its history (see, for example, Heard & Bolce, 1981). Given that work on the subject of social contracts has been published since the 1700s, this can only be seen as cursory attention. Yet, social contract arguments have been central to the tradition of social change and reform (Donaldson, 1982). As acknowledged by Deegan (1998) however, many papers use the notion of the social contract as part of other theories, eg. legitimacy theory, where “…there is a ‘social contract’ between the organisation and those affected by the organisation’s operations” and which may be revoked if they operate outside the terms of the contract (Deegan, 1998, p. 17).

A major criticism of the early work undertaken in developing a theory for CSR has been that the state’s role has been ignored (Gray et al, 1988; Lehman & Tinker, 1997) or it is assumed that the state “…pursues a neutral, mediating role in conflict resolution” (Tinker, 1991, p. 29). Most alternative approaches, such as those encouraging ‘participatory democracy’ (Lehman, 1995, 1996), suggest some form of mandated disclosure or reporting by corporations, imposed by the state, for the benefit of the rest of the community. That is, enforcing the social contract as opposed to being left to market forces. What is not considered however, is the accountability or obligation that arises from this, and why corporations (or other institutions for that matter) should be so obliged to provide such information. The concern of this paper is twofold. First, the paper considers the state’s role in enforcing social accountability. It advances the notion raised by Lehman and Tinker (1997, p. 10) that “within middle of the road liberalism, itself, there exists justifications for the state to move beyond its [current] remit”. Second, the paper considers the political obligation that necessarily underlies state regulation, and uses fairness theory to justify such obligation.

There have been some notable attempts to elaborate on the notion of social accountability in the literature. Lehman (1995) uses Rawls’ theory of justice to examine and support the concepts of accountability and transparency in environmental reporting (considered to be a sub-set of social reporting). He discusses the “social and moral obligations” (p. 394) of organisations to provide an account of their activities, and that “accountants have a duty” (p. 403) to provide such an account. While this paper has no argument with Lehman’s (1995) ideals, it questions whether such a duty will ever be recognised and acted upon without coercion. Similarly, other researchers discuss reasons that corporations ‘should’ account for their actions based on ‘moral’, ‘ethical’ or ‘fair’ grounds (Gray, 1992), but do not consider how we ensure the ‘should’ becomes ‘does’.

This paper takes the position that while the desirability of accounting for social and environmental activities of organisations is undisputed, the means to ensure provision of that account must lie (at least in part) with the state. That is, regulation or legislation is necessary to force organisations to report as a first step towards achieving social accountability. A justification for the adherence of organisations to such regulations can then be based on the notion of political obligation (as opposed to simple obedience) along similar lines to those presented by Lehman (1995). In this paper an argument based on fairness theory is presented. The paper outlines how such actions by the state can be seen as being within the state’s current functions, and why coercion by the state is justified.

The paper is structured as follows. The next section discusses the state as it is defined in this paper and an examination of its role in enforcing social accountability. This is followed by a general discussion of the literature on political obligation and details of fairness theory that is drawn upon in this paper. Finally the theory is applied in a discussion of the emergence and enforcement of social and environmental accounting practices.

The State

To talk of a ‘state’ is to use a shorthand term for a way of thinking about the political relations between members of a community. The state is an independent political community; a rule-governed association of people occupying a defined territory and organised under a sovereign government - that is, one that has supreme civil power and authority. A sovereign state is one that exercises authority as a matter of right over all persons within that state and that has no authority competent to override it within its territory. Furthermore, if there should be conflict between individual citizens and the state, the state as sovereign would prevail in that conflict. Not every political entity we call a state has full sovereignty. States within a federation or commonwealth[1] surrender part of their sovereignty to the federal state. Reference to ‘state’ in this paper is to sovereign states.

There are certain features of a state that distinguish it from other associations (Benn & Peters, 1959):

1.A state claims compulsory jurisdiction over all those within its territorial boundaries and those legal boundaries can also include external territories. It claims universal jurisdiction over those within the boundaries, whether they are members of that state, that is, citizens, or resident aliens or merely visitors. Its rules take precedence over any other rules applying within its borders, such as those laid down by the church, for example. Associations other than the state have limited power and areas of influence. The state, by contrast, has a substantial amount of power and the potential to interfere in the lives of its residents.

2.The state’s primary functions are to keep order, maintain internal security and protect itself from external threats. It also provides public goods for those living in its territory. One thing that distinguishes states from other forms of association is that the scope of the state’s functions is indeterminate.

3.The method by which a state carries out its primary functions is through the use of law supported by coercive powers. Although most associations can apply sanctions when their rules have been broken, these are only enforceable if the state permits them to be so enforced. Only the state has the right to give this permission since it has a monopoly on the legitimate use of coercion.

Liberal Democracy

The discussion in this paper is concerned only with Western liberal states. Such states have the following features: they are pluralist, multi-party, representative democracies, in which governments are elected for limited terms by universal franchise. The famous four freedoms - of thought, speech, conscience and of the press - are officially endorsed, as is the freedom to do what one wills unless and until it is restricted by law. These states have a primarily capitalist mode of production, in which the motivation for production is profit, and the means are privately owned. However, there are notable areas in which the state intervenes, such as health, welfare and education, and, to some extent, in the marketplace itself (Linley, 1986).

It has been observed that “Western liberal states are in fact liberal democracies, combining principles of individual liberty with principles of collective self-government and egalitarianism” (Barber, 1985, p. 55). However, ‘liberal democracies’, as many people have claimed, are neither fully liberal nor fully democratic. The democratic ideal, of maximum participation of all citizens, is in direct contrast to the liberal ideal, which has at its heart an ideal of freedom to pursue one’s own ends. Liberals focus on the freedom of the individual to choose their own road, consistent with the freedom of others. That is, one has the right to do as one wishes subject to the constraint that one may not infringe on the rights of others. The salient point to note is that it is the individual who takes primacy over the group. The view of classic liberal theory holds that political liberty is concerned with the restriction of the power of the government, not merely with restraints imposed either through lack of capacity, means or opportunity. The state, in the purest form of liberalism, is not permitted to encroach on the citizens’ activities except to preserve their freedom. If there were such a thing as a purely liberal state, it would act as an arbitrator and watchdog. It should be strictly neutral when dealing with the citizens, so that the processes used in so dealing with conflicts between citizens would not favour any one interest, but instead would facilitate the maximisation of each citizen’s freedom.

Liberal democratic states generally have a representative democratic system. Democratic systems of government try to ensure political equality through universal suffrage and equality of opportunity in influencing political leaders. Western liberal democracies are not democracies in the classical sense in which all citizens make all the decisions because the growth of large, more impersonal states made this impossible. Representative democracies are a compromise in which ordinary citizens have access to the political domain by choosing their representative. The representative votes in parliament, not as the citizen tells him or her to, but as though he or she had a mandate to act as the citizens might have chosen to. Pateman (1979) suggests that in fact the only democratic element in modern states is universal adult suffrage, enabling all adults to at least vote for a representative. The problem for liberal democracies is that the more democratic they get, the less liberal they are likely to be - and vice versa. In spite of this problem, a liberal democratic system is argued to be better than any other political system because it better promotes people’s individual rights. One justification for the state is that it enhances the freedom of each individual in the context of the constraints forced upon people through living in a society. It is most likely that liberal democratic states will have demonstrable political obligation. This is so because the liberal aspect of the political system tries to ensure people’s individual rights and freedom, and permits them to make their own decisions. At the same time, the democratic aspect, in theory, ensures that people have adequate representation in the policy making of their state. The citizens of a liberal democratic state, including corporate citizens (see discussion later), are to a large extent both the beneficiaries and the initiators of rule in those states, and their political obligation, if any, will be derived from their involvement in the activities of the state. The state will function most effectively when citizens accede to its demands. One important political obligation is the obligation to help to maintain the state which, for most citizens, is generally done by obeying the law.

Green (1988, p. 5) suggests that “…a state is legitimate only if, all things considered, its rule is morally justified”. Where such rule is not morally justified, there can be no political obligation. To say that a state is legitimate is to say both that the state functions according to accepted rules - accepted, that is, by those who are to obey them - and that the state’s use of power is justified in that it supports and fulfils the political desires and values of the people within that state.

Political Obligation

This paper views political obligation as obligation that arises from participation within the political areas of life, as will be discussed below. It might be thought that political obligation creates legal obligation, but this is not the case. To have a legal obligation is to be constrained to comply with those rules established by the law-making body within a particular political community, just because they are so established. One can have legal obligations without having political obligations, but if one has political obligations then one automatically has legal obligations as part of that political obligation.

Many of the demands our political community makes of us are couched in terms of obeying the law, and doing so is assumed to be a demonstration of our acceptance of our political obligations. A citizen is a member of a political community, unlike someone, such as a resident alien, who is merely subject to its control. The following discussion assumes that if anyone can be held to have political obligation, it will be those people who are citizens of a state. In fact, part of the concept of political obligation is that it applies primarily to those people who are full members of their political community[2], including corporations as will be discussed later.

Asking the ordinary person if we have any obligation to the state may elicit two different replies. One is a reply focussing on obedience for purely practical reasons such as security or fear of sanctions, and this reply may be given by both citizens and resident aliens. The other reply concerns the special relationship that they believe citizens have with the state that stands apart from the practical questions of community living. This paper is not concerned with the prudential reply. Its concern is whether there is a special relationship between citizen and state, whether there are any obligations attached to citizenship, and the philosophical explication for that obligation.

Justifying Political Obligation

Modern liberal democratic theory holds all citizens to be political and legal equals. The state, as the embodiment of the political community, is an entity that organises and administers community systems; arbitrates to resolve conflict, both civil and criminal; carries out programs to achieve social justice and other welfare, health and education programs; and provides essential goods and services such as roads, defence, and so on. Many people believe that part of the state’s role is to ensure the provision of these goods and services. That most modern states do so is obvious. This does not refer to any specific state, but to modern states that profess to be liberal democracies, since there are sufficient similarities among them that these remarks will apply to them all in broad outline. The question is whether the provision of these goods and services gives the state the right to any relationship with its citizens apart from its role as adjudicator and protector.

To many the primary purpose of the state is its maintenance and the concomitant provision of goods and services. Since this is the case, there are good reasons for thinking that it is fair to ensure that all contribute to the provision of those goods and services. This is particularly so since those goods and services include such things as the protection of law and government, which are available to all. The point is whether the state’s provision of goods and services is sufficient return to the citizen for the costs inherent in the restriction of autonomy and foregone enjoyment.

The relationship of citizens with the state is a reciprocating one, in which both state and citizens make demands on each other. Citizens expect that the state will provide, or at least facilitate the provision of, certain goods and services. Some, such as welfare, health services or education, could be provided by private contractors to those who can afford to pay for them. More difficult to provide privately are public goods, such as defence, policing, clean air or unpolluted water.