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Eric Orts on business theory

Business is one of the most powerful and influential institutions in our world today, but there has been relatively little theoretical work from scholars. With the increasing number of threats and challenge, now is a valuable time for questions to be asked regarding business theory. We sat down with Eric Orts, author of Business Persons, to discuss thinking critically about business institutions in a theoretical manner.

What is the most pressing or controversial issue in business theory right now?

There are a number of pressing issues in the field.

(1)    Increasingly, calls have been made for business to be part of the solution to global problems. This includes advent of “hybrid social enterprises” which combine a for-profit objective with a social or environmental agenda. In other words, they attempt to bring the discipline of profit-oriented business thinking to address large-scale problems by, for example, providing a new agricultural services, water sanitation technologies, or improved sustainable products. Many of these new business ventures focus on poor parts of the world – at a time when the divide between “rich” and ”poor” parts of the world is becoming more and more severe.

(2)     What social theories are informing current practices of executive compensation in large corporations and financial enterprises today?  Simplistic economic theories that reduce corporate governance to principal-agent models (“principals” conceived as shareholders and “agents” as managers) have become much too influential and have provided an underspecified justification for increasingly unequal levels of executive compensation. Recent levels of executive compensation, most notably in the United States which has been the main source of these theories, have been called “outrageous” and even “obscene” by many usually even-keeled commentators. But reforms recommended to date appear to be stuck with outdated theories. I argue that reasserting an essentially legal theory provides a more accurate and realistic account of social forces within corporations that conspire to create radically unequal pay structures without a convincing rationale. Law provides a means to correct these problems as well, if the political will to do so develops. Exploding the acceptance of the economic justifications may have practical value as well, even without outside legal change.

(3)    What legal rights should business firms be recognized to assert? This issue has broken through to widespread consciousness and concern after the decision by the US Supreme Court in Citizens United. How do business firms fit into conceptions of the role of business in politics? Should there be limitations imposed and, if so, what are they?  Another recent case in the US Supreme Court involves the potential responsibility of corporations as “legal persons” for violations of internationally recognized human rights, especially when the violations may occur in other jurisdictions than a corporation’s “home” country. These are very difficult questions, and they cannot be answered without a clear understanding of what exactly business firms are.

US Supreme Court. Image Credit: Uschools University Images, istockphoto

How has the thinking or approach evolved on business theory?

In the United States and many Anglophone countries – and to a lesser extent in continental Europe and elsewhere – the jurisprudential school known as “law and economics” has gained a stranglehold on most, if not all, of the leading law and business schools in the country. Those of us teaching mainly in business schools recognize that there are many important arguments and theoretical positions taken within the discipline of economics.

A great deal of damage has resulted, in my opinion, including the deregulation in the United States that culminated in the financial excesses that caused the Great Credit Crash of 2008 and the ensuing Great Recession. Entrenched professors are surprisingly resilient to change, though some (including the law-and-economics founder Richard Posner) have had the courage to look in the mirror and to recommend major change. The tenure system (which I support on other grounds) probably also has the tendency to make academia relatively impervious to challenge, even when their theories contribute to bad outcomes.   In the aftermath of the global financial crisis (or at least the last big one), I believe that there is now an opening for those of us who have been saying for awhile that the some of the emperors of economics have no clothes.

Good economics is essential for good law, but economics does not give all the answers to hard legal problems. To set the rules governing complex human organizations such as business firms (including large corporations) without considering other important perspective is neither useful nor correct. In the longer term, I would like to see law faculty (both in law schools and elsewhere in the university) return to some basic legal understanding and methodologies. The “law and” movement should include not only economics, but also ethics, politics, history, and sociology/anthropology.

Moreover, a focus only on economics often leads to a purely “instrumental” view of the world – as well as a very selfish one – that leaves no room for ethics and basic political principles (such as freedom of expression and human rights). We know that different theories are what change the world in the long term. They are a source of new hope for future generations and provide foundations for the development of human civilization as it faces new, global challenges.

What was the most popular discussion topic at a recent conference you attended?

I attended and chaired a session on the Fukushima nuclear disaster at the Wharton Global Forum in Tokyo in the spring. The presentations by major leaders of business and government who had to deal with this crisis in leadership positions were extremely interesting and poignant. Also, this disaster serves as an example of how some parts of the world can be immune to thinking about huge issues that occur elsewhere. The effect of Fukushima in Germany was significant, but in the United States, the issue has come and gone without much perceptible impact on public opinion.

What are you reading at the moment in your field?

I’m about to teach my courses in Corporate Law and Finance and in Responsibility in Professional Services as a visiting professor at INSEAD in France this fall and winter.   As a result, I’m reading some basic materials such as John Boatright’s edited Finance Ethics: Critical Issues in Theory and Practice (2010) and some other sources in an attempt to “globalize” and generalize my understanding. I’m also rereading some treatments of conflicts of interest as a generic problem in financial services and corporate governance. It will be an interesting shift for me from teaching graduate courses at Wharton in which approximately 60% are American to those at INSEAD where only approximately 8% will be American. But I’m sure that I will learn a great deal from the experience, as I have in the past during other opportunities to teach and attend conferences in other countries such as China, Brazil, and Indonesia.

What first attracted you to your discipline?

I decided to go to law school after studying government and political science in undergraduate and graduate school. A few law-related courses in graduate school convinced me that I wanted to study law seriously. I realized that law provides the most basic institutional foundation for many phenomenon that we now take for granted:  contracts, property, and business firms, as well as the more obvious constitutional structure of government and politics. I also worked as a paralegal at Skadden Arps in New York City when going to graduate school and learned that I really had no idea how the massively influential decisions about mergers and acquisitions of large companies occurred. In a sense, perhaps I began to realize that business and the structure of business held some of the most important questions for our time. I had other plans originally, but the life of the scholar and teacher has become my true calling.

What advice would you give to someone wanting to specialize in your field?

Consider the option of teaching law in a business school. I chaired the faculty search committee for Wharton’s Legal Studies and Business Ethics Department last year and was very happy to hire our three top candidates. I think that our good fortune owed in part to significant economic problems that US law schools are now facing. President Obama’s surprising comment weighing in on the side of reducing legal education to two years may increase this pressure going forward (especially if he retires from office back into the academic fold). I also believe that law should not be a subject that only future lawyers study. It is a fundamental institutional in its own right that functions as a kind of “legal matrix” that everyone should understand. I believe that our laws should not be left only to lawyers. I wrote Business Persons at a level that will be accessible to scholars and students working in other disciplines for that reason.

Eric W. Orts is the author of Business Persons: A Legal Theory of the Firm, which presents a foundational legal theory of business firms which is the first to embrace and explain the potential of benefit corporations and other “hybrid social enterprises.” Eric Orts is the Guardsmark Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. He is also a Professor of Management, faculty director of the Initiative for Global Environmental Leadership, and faculty co-director the FINRA Institute at Wharton. He will be a visiting professor at INSEAD in France in the fall of 2013. Read his previous blog post.

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Image credit: US Supreme Court. Image Credit: Uschools University Images, istockphoto.

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