J Bus Ethics (2011) 102:43–57

DOI 10.1007/s10551-011-1193-2

Business Ethics as Self-Regulation: Why Principles that Ground

Regulations Should Be Used to Ground Beyond-Compliance
Norms as Well
Wayne Norman

Published online: 19 January 2012

 Springer Science+Business Media B.V. 2012

Abstract Theories of business ethics or corporate Introduction

responsibility tend to focus on justifying obligations that go
above and beyond what is required by law. This article It is widely agreed, and often stated on the opening pages
examines the curious fact that most business ethics scholars of textbooks and scholarly articles, that
use concepts, principles, and normative methods for iden-
1. Theories of business ethics (and theories of cor-
tifying and justifying these beyond-compliance obligations
porate social responsibility, corporate citizenship,
that are very different from the ones that are used to set the
sustainable development, and so on) are largely
levels of regulations themselves. Its modest proposal—a
concerned with justifying obligations that go above
plea for a research agenda, really—is that we could reduce
and beyond what is required by law (that is, with
this normative asymmetry by borrowing from the norma-
justifying ‘‘beyond-compliance obligations’’).1
tive framework of ‘‘regulation’’ to identify and justify an
important range of beyond-compliance obligations. In It is possible to do something unethical without breaking
short, we might think of ‘‘self-regulation’’ as a language the law; not everything that is legal is ethical. This is, of
and a normative framework with some distinct advantages course, a truism. But there is much of interest going on in
over other frameworks like stakeholder theory, corporate and around this space between what the law requires and
social responsibility, corporate citizenship, and the like. what ethics requires. Obviously, there will always be
These other frameworks have been under attack in the healthy disagreements about the appropriate level for any
business ethics literature of late, primarily for their given regulation, and about how much higher should be the
vagueness and their disappointing inability to distinguish standards for ethical (or socially responsible) behavior. But
clearly between genuine beyond-compliance moral obli- what we will be most concerned with in this article are:
gations, on the one hand, and charitable acts that are (a) looking at the curiously different kinds of normative
laudable but not morally obligatory, on the other. rationales for most business regulations, on the one hand,
and most ethical exhortations to exceed them, on the other;
Keywords Business ethics
Regulation
Self-regulation
and (b) furthering the exploration of what basic language,
Corporate social responsibility
Stakeholder theory
or normative and conceptual scheme, is most helpful for
Corporate citizenship
Beyond-compliance obligations
grounding beyond-compliance obligations.
Market failure Most of the discussion to follow is about why business
ethicists could benefit from the normative and empirical

1
I hesitate to provide citations for this claim. Relatively little space
in business ethics textbooks and articles is spent explaining why
illegal activities like fraud or assassinating competitors are also
unethical. Business ethicists tend to devote much more attention to
W. Norman (&) identifying and criticizing the legal activities that seem unethical. But
Duke University, Durham, NC, USA for explicit acknowledgment of (1), see e.g., Eberlein and Matten
e-mail: [email protected] (2009, p. 242) and Carroll (1991).

123
44 W. Norman

toolkits used by economists, lawyers, and political scien- 2. An ethical business or businessperson (or a socially
tists when they design and justify business regulations. But responsible firm, or a good corporate citizen, etc.)
the main thrust of this article is philosophical and meta- must also obey all relevant laws and regulations.3
ethical. We are sketching a case for why it would be
Now it is a curious feature of business ethics scholarship,
helpful in business ethics to justify beyond-compliance
as it has evolved over the past three decades or so, that
obligations for businesses and businesspeople by using a
most people publishing in places like Business Ethics
particular language and set of concepts. If this claim were a
Quarterly or the Journal of Business Ethics, and even in
slogan it would be: ‘‘business ethics as self-regulation.’’
many of the standard business ethics textbooks, have
But that slogan can be interpreted in many ways we do not
relatively little (and often nothing) to say about the basic
intend. What we intend are two related but distinct claims.
justification of laws and regulations for business.4 Issues
First, that the very same tools and concepts we use to
around the design and justification of regulation have
recommend regulatory standards for governments can also
largely been left to experts in political science and public
be used to justify business practices, policies, and proce-
policy (focusing on actual procedures of government and
dures that are ‘‘higher’’ or ‘‘more demanding’’ than the
bureaucracy, and of lobbying, and producing some recom-
actual regulations in force. And second, that the language
mendations for reform) and to economists (where justifi-
and institutions of government regulation can be (and have
cations for regulating markets mirror more general
been) replicated in useful ways by individual firms—or
justifications for having free markets to begin with). In
partnerships between firms, non-governmental organiza-
studying the actual process of creating and reforming
tions (NGOs), and governments—to create forms of self-
regulatory bodies and regulations, political scientists are
regulation and co-regulation that are either a second-best
often most struck by the extent to which regulatory bodies
solution, or in some cases a superior solution, to undesir-
are ‘‘captured’’ by business interests and even particular
able business practices that persist in the absence of reg-
businesses5—a phenomenon that receives surprisingly little
ulation. Now there is a significant and interdisciplinary
attention in the business ethics literature. For economists,
body of literature on this second idea, and we shall only
the basic rationale for regulation of markets is something
gesture toward it here. Our principal claim is the first,
like this:
philosophical, one.
So, our simple suggestion will be that it can be helpful to 3. Markets may be (and in some cases clearly should
look at the realm of beyond-compliance obligations through be) regulated to prevent, minimize, or compensate for
the lens of ‘‘regulation’’ or ‘‘self-regulation.’’ This does not market failures.6
mean that all of ethics or even business ethics can best be
Market failures are those features of almost all actual
understood as a form of self-regulation. What we propose—
markets that diverge from the conditions of the idealized
and in this short paper we are really only preparing the way
perfectly competitive markets. With market failures, ‘‘pri-
for a larger project—is that business ethicists consider the
vate markets fail to achieve allocative (or Pareto) effi-
appropriateness of the language of self-regulation as a
ciency’’ (Brander 1995, p. 36). The types of market failures
potential alternative or supplement to other frameworks like
most frequently giving rise to regulations include negative
‘‘stakeholder theory,’’ ‘‘corporate citizenship,’’ or ‘‘corpo-
externalities (such as pollution, workplace accidents, or
rate social responsibility,’’ to name just three prominent
dangerous products) which impose costs on third parties
examples. This article can be seen as a contribution to a
that are not built into the price; asymmetric information
burgeoning movement in the field that is attempting to
(where sellers know much more about the product that
develop a more unified normative theory of business obli-
buyers possibly can); market power (where a single
gation, one in which there is more convergence than we
monopolist, or a small number of dominant players, can
typically see now between the kinds of principles and justi-
extract ‘‘unfair’’ rents); or the disincentive to produce
fications appropriate for markets, market regulations, gov-
ernance and corporate law, and beyond-compliance ethical
obligations.2
3
Let us continue with three more relatively uncontro- Naturally, as with any normative theory of legal obligation, we
versial claims. In addition to accepting (1), above, almost would want to have room for the ethical disobeying of certain unjust
laws. This may require transparently breaking a law as an act of civil
all writers in the field assume that, of course:
disobedience (see Rawls 1971, pp. 363–368).
4
Among notable exceptions to this generalization are Heath (2006),
McBarnet (2007), Boatright (2011), and Crane and Matten (2010).
5
2
For a rather broader sketch of different proposals for a ‘‘unified See Stiglitz (2010).
6
theory’’ of business ethics, see Donaldson and Dunfee (1999), Heath Friedman (1962), Viscusi et al. (2005), Brander (1995), and Cowen
et al. (2010), and Norman (2012a). and Crampton (2002).

123
Business Ethics as Self-Regulation 45

public goods.7 Market failure is a problem because it globally (or at least across a society or state) and into the
potentially (though not always) interferes with the ‘‘invis- indefinite future.9
ible hand’’ rationale for allowing free markets in the first Up to this point, I expect that the numbered propositions
place. If the externalized cost to a third party is high and explanations will all have been mostly uncontroversial
enough, for example, then the sum of the benefit that both reports on the way typical scholars (or textbooks) in par-
the buyer and seller receive from their transaction will not ticular disciplines like philosophy and business ethics,
increase social welfare. Economists accept other reasons economics, and public policy have thought about regula-
for government intervention in the economy—such as tion and ethics. Here is another such generalization,
macroeconomic stabilization, and considerations of justice although this one would require a bit more intellectual
and fairness. But minimizing market failures, and the anthropological digging to support it. That is, it is not an
enabling of new markets in a way that minimizes the observation that is typically noted in textbooks or subject to
chance of certain market failures, are the official rationales much direct reflection, but I believe it is true:
for the vast body of regulations affecting day-to-day
4. When business ethics scholars attempt to identify
business practices. It goes without saying, of course, that in
and justify beyond-compliance ethical obligations,
any given state, the actual regulations on the books will not
they rarely rely directly on the concepts or methods
necessarily be the ones that would have been justified by a
used to justify the regulations that define the level of
careful consideration of how optimally to compensate for
compliance.
market failures or other undesirable features of the market.
What we are concerned with here, however, are the nature Business ethicists rarely appeal to market-failure correction
of compelling arguments for designing and justifying or cost-benefit analyses when proposing more rigorous
business regulations. standards for ethical business conduct,10 but rather appeal
Claim (3) above does not state that the existence of a to any number of principles and values: ideals of social
market failure is either a necessary or sufficient justifica- responsibility and stewardship, often via notions of social
tion for a regulation. But it is consistent with the idea that contracts and a ‘‘license to operate;’’ ideals of corporate
in economics and public-policy circles, showing the effects citizenship; social and environmental ‘‘bottom lines;’’
of a market failure gets the argument for a regulation going sustainable development and the so-called precautionary
even among generally pro-business and pro-market social principle; stakeholder interests and rights; traditional
scientists (e.g., Friedman 1962). It should also be said that Judeo-Christian or Aristotelian virtues and vices; and
even in what we might call ‘‘ordinary political discourse’’ sometimes liberal-democratic norms of justice, fairness,
or ‘‘civil society,’’ the existence of a market failure is at the equality, and democracy.11 This normative asymmetry in
root of many calls for regulation. Of course, ordinary (4) is a curious fact (assuming that it can indeed be
political discourse does not use the bloodless language of supported by a scholarly survey we cannot provide here). It
market failure: rather it will be phrased in terms of concrete is not automatically a criticism of either the normative
problems like environmental degradation, greenhouse tools used to fix levels of regulation, or the tools used to
gasses, hazardous working conditions, poisonous toys or justify duties above and beyond these regulations. But it is
food, unscrupulous sellers or brokers exploiting vulnerable an asymmetry that is worth investigating.
consumers, and so on, all of which can be translated into
claims about classic market failures like negative exter-
nalities and information asymmetries.8 To get from the 9
This reliance on cost-benefit analysis was reiterated by the
uncovering of a market failure to the implementation of a ‘‘regulations Czar’’ in the Obama administration, the renowned law
professor Cass Sunstein. See Sunstein (2009). See also Sunstein
law or regulation, an argument will have to be made that
(2002).
the regulation will not do more harm than good. If econ- 10
There are of course very noteworthy exceptions: in particular,
omists are making the argument they will typically perform Heath (2006), which sketches a novel and promising ‘‘market-failures
a ‘‘cost-benefit analysis’’ in which the burdens and benefits approach to business ethics’’ that will be discussed at length in the
of a proposed regulation will be estimated and aggregated ‘‘Self-Regulation as an Institutional Practice’’ section.
11
We hesitate to attach citations of particular business ethicists to
each of the concepts in this long sentence, since it literally includes
7
most of the approaches that are current in the scholarly field today.
For a brief standard economics textbook account, see e.g., Brander Works best exemplifying these approaches can be easily located in
(1995, Chap. 3); for a canonical textbook on the economics of recent reference volumes in business ethics, such as Brenkert and
regulation, see Viscusi et al. (2005). Beauchamp (2010) or Bowie (2002), or in textbooks like May et al.
8
Other calls for regulations follow scandals involving corruption, (2007), Gibson (2006), or Crane and Matten (2010). Our point here is
fraud, theft, and other criminal activities by business people. There is that each of these approaches has a rich vocabulary of normative and
probably no reason to draw a direct link between these things and empirical concepts that one would not expect to see in, say,
market failures, though sometimes it makes sense. economics textbooks on regulation, such as Viscusi et al. (2005).

123
46 W. Norman

An Unstable Asymmetry the authority and (in some formulations) the fiduciary duty
to advance the interests of all stakeholders, not merely the
What we wish to suggest in the next section (following this shareholders’; but the ‘‘theory’’ itself offers no particular
one) is that this normative asymmetry between the justifi- formula for this task. Of course nobody denies that there
catory tools for setting compliance levels and the justifi- are compelling business reasons—and ethical reasons—for
catory tools for moving beyond compliance (for brevity’s building strong stakeholder relations, and that there are
sake in this article, we shall mostly refer to this as simply many reasons why business leaders and business scholars
‘‘the normative asymmetry’’) can and should be reduced. will want to use the vocabulary of stakeholders. My only
And in particular, our modest proposal will be to allow the point here is that this vocabulary is not particularly useful
tools of regulation to ‘‘break through’’ the compliance line, in helping insiders or outsiders to determine and to justify
so as to speak. That is, to encourage the use of regulatory valid claims about the precise rights of particular stake-
justificatory tools in the design and justification of business holders or the duties they are owed by the corporation or its
practices that go beyond the minimal standards defined by managers. In short, whatever else it may be, it is not a
government regulation. In short, we shall be encouraging justificatory ethical theory of a sort that we might have
the more widespread use of the language of ‘‘self-regula- been expecting when stakeholder theory used to be said to
tion’’ within debates that are now couched mainly in lan- underpin a form of Kantian capitalism (e.g., Evan and
guages like ‘‘corporate social responsibility,’’ ‘‘corporate Freeman 1988). So although it may be very useful to refer
citizenship,’’ ‘‘sustainability,’’ ‘‘stakeholder theory,’’ and to stakeholders in strategic management, public relations,
such. and mission statements, there is no ‘‘theory’’ that justifies
Our unease with the current normative asymmetry is giving managers the right or responsibility to decide which
twofold: a dissatisfaction with the way many of the nor- stakeholders’ interests deserve the most attention and
mative frameworks or tools are currently used in business reward; that tells them exactly how they are supposed to
ethics scholarship to justify beyond-compliance obliga- ‘‘balance’’ these interests; or that justifies rewriting cor-
tions, and an optimism that the under-exploited resources porate law to allow each stakeholder group a voice on the
of the self-regulation paradigm could help us to make some board (admittedly, one of the more radical implications of a
progress. It is beyond the scope of this short article to hard-core stakeholder theory) or that protects stakeholder-
rehearse all of the reasons behind the dissatisfaction with sensitive managers from having their firm taken over by
the status quo in business ethics. For our purposes here, owners demanding shareholder wealth maximization.14
then, we are primarily addressing an audience that already Similar worries have arisen with respect to the poverty
feels this unease. So-called ‘‘stakeholder theory’’12 has of normative tools for making and justifying beyond-
dominated academic discussion of large-scale corporate compliance policies and practices within frameworks such
ethical decision-making over the past two decades. But it as ‘‘corporate social responsibility’’ and ‘‘corporate citi-
has been hammered in recent years by powerful and zenship,’’ even if these remain powerful metaphors for
searching critiques from different directions, and there is rethinking the corporation’s role within society. The
no evidence of an equally robust response to aid in its problem here, again, is not so much the lofty goals and
resurrection or defense.13 The theory would give managers recommendations made for businesses in the name of CSR
or good corporate citizenship, but rather, the disappoint-
12 ingly primitive state of the normative concepts themselves.
It is not clear that it makes sense to call it a ‘‘theory,’’ as even some
of its most ardent supporters now seem to admit. In a survey article Careful analyses of the core concepts of ‘‘responsibility’’ or
from 2002, Thomas Jones, Andrew Wicks, and Ed Freeman explicitly ‘‘citizenship’’ do not help us clarify exactly how far a given
use the term ‘‘stakeholder theory’’ to denote not a theory per se, but firm or manager should exceed legal standards of conduct,
‘‘the body of research which has emerged in the last 15 years by
or in which cases they must be willing to sacrifice long-
scholars in management, business and society, and business ethics, in
which the idea of ‘stakeholders’ plays a crucial role.’’ In Norman term profits for the sake of beyond-compliance obligations.
(2012b), I suggest that we think of ‘‘stakeholderism’’ as more of an If anything, these core concepts confuse and obscure these
ideology than a theory. Or as its proponents sometimes call it, a issues. ‘‘Responsibility’’ is a notoriously vague and ambig-
‘‘mindset’’ or ‘‘attitude.’’
13
uous deontic concept compared, say, to the concept of an
For recent critiques, see e.g., Marcoux (2003), Heath and Norman
(2004), Heath (2006), Boatright (2006), and Orts and Strudler
(2009)—this last article, published in the Journal of Business Ethics Footnote 13 continued
by two senior professors at the Wharton School is entitled ‘‘Putting a Freeman and his co-authors in a book called Stakeholder Theory:
Stake in Stakeholder Theory’’ and its first line declares that State of the Art (2010). I discuss this restatement at some length in
‘‘Stakeholder theory has become a vampire in the field of business Norman (2012a, b).
14
ethics….’’ (!). We have yet to see a spirited and rigorous defense of See Evan and Freeman (1988) and Freeman and Evan (1990). The
the theory to the kinds of critiques leveled in these articles, not even more recent restatements of the ‘‘theory,’’ such as Freeman et al.
in the lengthiest restatement of the theory by its ‘‘father,’’ Edward (2010), have dropped the more radical proposals.

123
Business Ethics as Self-Regulation 47

obligation or a right; and what we quickly learn is that genuinely profitable, all things considered) that are legal
managers and firms have all sorts of competing and con- but possibly unethical or irresponsible.
flicting responsibilities with respect to different constitu- We must emphasize that this is a philosophical claim
ents or stakeholders.15 It has also become clearer in the about ethical tools. Nothing we are arguing here requires
business ethics literature of recent years, even to scholars that we stop using the language of CSR, stakeholders, or
like Crane and Matten who make use of the concept of corporate citizenship in either academic or business set-
corporate citizenship, that the classic notion of ‘‘citizen- tings. Once we have determined an appropriate and justi-
ship’’ is potentially quite misleading when applied to fiable set of rights (for stakeholders) and obligations (for
corporate actors. No one would dream of granting corpo- firms or their managers) in some particular context, it is
rations most of the rights or duties of individual citizens. If perfectly natural that we might describe the policies,
the notion of corporate citizenship is useful at all it may be practices, and accomplishments as examples of a firm’s
as a rhetorical device to remind us of the importance of commitment to CSR or to being a good corporate citizen.
scrutinizing the political activities of corporations (some- Indeed, there is every reason to think that the languages of
thing that is, oddly enough, rarely emphasized by people CSR, corporate citizenship, sustainability, and the like are
who use the language of corporate citizenship).16 in fact the natural way to draw attention to a coherent set of
Suffice it to note that after more than two decades of practices that demonstrate a corporation’s commitment to
intense scholarly activity, the community of business eth- maintain beyond-compliance standards across a broad
icists has yet to produce a Theory of Corporate Responsi- range of its impacts on stakeholders and others. The very
bility that plays the role that John Rawls’s A Theory of basic claim we are making here is that it does not follow
Justice (1971) played for political philosophers in the from this that we need, or should, use the tools implicit in
1970s and 1980s: a theory so rich and complex that almost those popular rubrics to explain (a) why or when there is a
all theorists in the field would have to explain at great genuine obligation for firms in some sector to adopt norms
length why they accepted it, wished to modify it, or that exceed those required by regulations, and (b) why that
rejected it. Our aim here is not to pretend to refute all obligation can be satisfied by the firms’ adopting a beyond-
approaches to articulating and justifying beyond-compli- compliance norm at a particular level, rather than at some
ance standards with the frameworks of CSR, stakeholder higher or lower level (say, to limit its emissions of a par-
theory, corporate citizenship, and the like. There is no ticular toxin to 67% of the amount allowed by law; or to
doubt, for example, that each of these approaches has led to require subcontractors to pay its workers in Sri Lanka at
valuable insights about how businesses can adapt to, and least double the minimum wage; and so on).
even profit from, changing social norms. Socially respon- Again, we do not pretend that this section will convert a
sible business models can enhance organizational func- partisan of one of these common frameworks for beyond-
tioning (e.g., by raising employee motivation, trust, and compliance corporate obligations. We are writing primarily to
retention), find or invent profitable market segments (say, a growing body of business ethicists who are already skeptical
for green or sweatshop-free products), insulate firms from of these approaches. But by rehearsing the standards com-
certain risks (e.g., from costly fines and law suits, or the plaints, we are also presenting the issues we believe our
imposition of onerous regulations), and so forth.17 But the ‘‘regulatory’’ approach handles more confidently.
common shortcoming for stakeholder theories and theories
of CSR and corporate citizenship is the lack of a clear,
compelling normative methodology that would allow cor- Toward a Greater Symmetry of Regulatory
porations, managers, or outside observers, to justify which and Beyond-Compliance Principles
beyond-compliance obligations must be met, and how
business actors are to trade-off in a reasonable way the The young scholarly field of business ethics has done most
claims of competing stakeholders. Most crucially, what we of its growing up during a period—roughly 1980 to the
still lack is compelling principle-based guidance for when present—in which ‘‘deregulation’’ has been the reigning
exactly firms in competitive markets must constrain paradigm in public-policy circles and in the US federal
themselves from pursuing profitable opportunities (that is, government (and eventually in the central governments of
most other western states).18 This may be a coincidence;
15
See e.g., The Economist (2005) and Vogel (2005, p. 171). but what is surely not coincidental is that business ethicists,
16
For an emphasis on the political role of corporate citizens, see and also what we might call ‘‘corporate responsibility
Néron and Norman (2008a, b), Crane and Matten (2008), Crane et al.
(2008), and Néron (2010).
17
For an illustrative survey of when ethics does and does not pay,
18
and in general for the reasons firms have been ‘‘turning to values,’’ see For a fascinating ‘‘pre-history’’ of academic business ethics, see
Paine (2003, Chaps. 1–3) and Reinhardt (2005). Abend (2011).

123
48 W. Norman

advocates or activists,’’ have focused relatively little of efforts to raise compliance standards. In fact, the
their attention on making the case for stiffer or smarter most critical dimension of corporate responsibility
regulations. Instead, for most of the time since the early may well be a company’s impact on public policy.
1980s both academic and non-academic business ethicists (Vogel 2005, p. 171)
seem to have assumed that the prospects for further regu-
Second, even in cases where we really do want to argue
lation in many realms of corporate irresponsibility are now
not for more government regulation, but rather for beyond-
remote enough that we must look for new (and new-fan-
compliance ethical standards, we should take a long, hard
gled) ways of arguing for voluntary ethical constraint. And
look at the resources available within the regulatory insti-
as we have emphasized already, we have tended to do this
tutional framework. ‘‘Self-regulation’’ is, to be sure, often
in normative languages very unlike the language, princi-
just a plea to be left alone, unsupervised, with no real
ples, and tools involved in justifying regulations (hence the
consequences for breaking promises or falling short of
‘‘normative asymmetry’’). We have a generation or two of
expectations (Ogus 1995). But there are also now countless
business ethics thinkers and activists who seem almost to
examples of genuinely effective self- and co-regulatory
ignore the fact that the most powerful way we have his-
regimes that serve as models for how firms (often in
torically made corporations more socially responsible, or
cooperation with NGOs and government or inter-govern-
better corporate citizens, is through state regulation
mental agencies) can maintain standards above and beyond
(including the pervasive threat of tort law). If a time-
those required by law (see Balleisen 2010; Eberlein and
traveler from the early twentieth century were to visit a
Matten 2009, pp. 242–245).
modern American industrial corporation that merely com-
Third—and this is the philosophical project I have been
plied with all regulation but did not have the time of day
pointing to throughout this article—we should make better
for CSR, she would be amazed at how truly progressive it
use not only of the existing institutions of self- and co-
was: from the cleanliness and safety of the workplace to the
regulation, but also of the conceptual frameworks of reg-
respectable wages and union rights of the workers; to the
ulation in order to make very specific evaluations of
quality of its products; the lack of choking emissions; the
business practices and serious business obligations. In
relative transparency, and general reliability, of its financial
effect, we should advance arguments that, in their starkest
reporting; the civility of its office culture and the visibility
form, would have roughly the following structure: You
everywhere of men, women, and members of several ethnic
shouldn’t do X because there are clearly identifiable rea-
groups working together; and so on. This is not to be
sons why X should be illegal, even though it is not in fact
Pollyannaish about the current state of affairs—obviously
(or yet) illegal; profiting from X is a perversion of the
there are still firms that are generally unpleasant to work
market system itself. (We may, for example, point out the
for or to deal with, and not all of them even comply with
magnitude of a negative externality that more than out-
existing regulation. The point is simply to remember
weighs the value created to the parties of a transaction; or
(a) just how appalling the mostly unregulated industrial
we may highlight the exploitation of an information
practices were in the not-so-distant past, and (b) to rec-
asymmetry on the part of the seller that borders on fraud.)
ognize the crucial role played in the mid-twentieth century
Of course, that is only the beginning of the case, but it
by the emergence of the principal regulatory bodies in all
displays the way we can tie a beyond-compliance obliga-
developed economies.
tion to the criteria we use to establish the level of legal
All of this leads to a modest threefold proposal for a
compliance: we ask how responsible and knowledgeable
research agenda for business ethics, and ultimately perhaps
regulators would determine if there was a real problem in a
to a reworking of the syllabus of a typical business ethics
functioning market, and how they would evaluate whether
course.
a regulatory response is called for, and if so, what form it
First, business ethicists should join colleagues at the
might take. The intuition here is that in a great many cases
normative fringes of economics, political science, sociol-
(roughly, many of the ones where we are inclined to think
ogy, history, public policy, and law in better understanding
that businesses are behaving irresponsibly) there is indeed
the nature and justificatory tools and procedures of business
a problem that, prima facie, merits regulatory norms; but
regulation. Sometimes the appropriate business ethics
that for many practical and political reasons, those norms
response to an unacceptable corporate practice should not
will not be developed or enforced, or will not be so to a
be simply to call for greater voluntary corporate responsi-
sufficiently rigorous level. And in at least some of these
bility on this front, but also to argue precisely for why
cases, the logic of the regulatory case for higher standards
regulatory reform is required. As Vogel emphasizes,
(say, based on a clear market failure, and cost-benefit
Corporate responsibility should be about more than analysis that shows an aggregate social improvement were
going ‘‘beyond compliance;’’ it must also include the standard to be adhered to) is a very compelling

123
Business Ethics as Self-Regulation 49

normative argument for an obligation for a particular firm, the United Nations’ Global Compact, and various business-
or all of the firms in a particular sector, to find a way to NGO partnerships in different parts of the world focusing
operate as if that higher standard were the law. This is the on the apparel, forestry, and coffee industries (among
basic logic behind our slogan ‘‘business ethics as self- others). In response to censorship and user-identification
regulation.’’ requests by governments like China’s, there is now a
For the remainder of this short article, we will offer a Global Network Initiative (globalnetworkinitiative.org) in
preliminary sketch of what self-regulation might look like which NGOs and academics have partnered with the main
as a framework for justifying beyond-compliance norms Internet players like Google, Microsoft, and Yahoo! to
and practices. In effect we are casting light on the sorts of develop common principles and procedures for dealing
empirical, historical, and normative issues that would have responsibly with such requests in the future.
to be assessed in the development of a robust ethical theory These large-scale associations and alliances have
of business self-regulation. countless lessons for business ethicists, many of which are
already being systematized by scholars in sociology, public
policy, and history.20 They remind us, among other things,
Self-Regulation as an Institutional Practice19 that our casual way of thinking about the ‘‘line’’ deter-
mined by the law, and the realm of ethical practices that go
The first thing to be said about self-regulation is that it is beyond the requirements of the law, is impoverished. The
already all around us. It preceded the growth of govern- law, in effect, relies on the presence of self-regulatory
ment regulation in the early twentieth century, and it has bodies, and sometimes refers to them directly in statutes
grown up in response to the slow pace of regulatory reform (see Eberlein and Matten 2009, p. 244). Business ethics
in recent years. Perhaps the most important form of self- scholars need to explore the language and toolkit of self-
regulation happens when a number of firms, typically regulation even for individual businesses not participating
within a common sector, work out a voluntary regulatory in industry trade associations or international standards
regime through some kind of industry or professional regimes. The US federal sentencing guidelines in 1991
association. Examples abound, from the classic professions gave rise to ethics and compliance offices and officers
with statutory authority (law, medicine, accountancy, within individual firms across corporate America, and this
engineering, etc.), to newer professions and quasi-profes- is still a vast experiment in the myriad forms and conse-
sions, some not yet having any official sanction (e.g., quences of self-regulation.21 The most impressive exam-
various ‘‘wellness’’ practitioners, or corporate ethics and ples involve many of the trappings of generalized
compliance officers). There are long-standing self-regula- regulatory processes: from consultation with a array of
tory bodies like stock and commodity exchanges that make internal and external stakeholders who help develop codes,
significant demands on their members and can impose rules, standards, and targets; to the systematic measure-
punitive sanctions; the Better Business Bureau, the ment of ‘‘compliance’’ with these rules and achievement of
Underwriters’ Laboratory, the Financial Industry Regula- targets; internal and external auditing of these results; and
tory Authority, the Motion Picture Ratings Board, and so transparent reporting.
on, all of which have all been around for decades. Since the And beyond learning from case studies of actual firms
late 1970s, we have seen the emergence of powerful practicing vanguard forms of self-regulation like this, we
independent bodies such as the Institute of Nuclear Power can envisage something that hasn’t really yet emerged:
Operators, the Defense Initiative on Business Ethics and namely normative theorizing about how to justify some of
Conduct, and the chemical industry’s Responsible Care these best practices (e.g., what constitutes an adequate
Program, all of which emerged after industry-shaking stakeholder consultation? which stakeholders have rights to
scandals or disasters. participate, and what rights do they have? what authority
Other self-regulatory regimes have developed from the should an ethics officer have within the firm?), and in
voluntary adoption of (often international) standards and particular about how to determine the appropriate ‘‘levels’’
alliances of businesses and NGOs. Noteworthy examples of self-regulatory standards.
include the International Organization for Standardization There is obviously something ‘‘realistic’’ about self-
(with tens of thousands of firms now complying with just regulation as a paradigm for business ethics. It tries to use
one of its comprehensive environmental management concepts and mechanisms familiar to any firm or manager
standards, the ISO 14001), the World Business Council for
Sustainable Development, the Global Reporting Initiative, 20
See e.g., Garvin (1983), Braithwaite and Drahos (2000), Scherer
et al. (2006), Barley (2007), McBarnet (2007), and Gond et al. (2011).
19 21
Many of the examples in the section have been drawn from, Ferrell et al. (1998), Paine (1994), and Ethics and Compliance
and are explained in fuller context in Balleisen’s (2010). Officer Association (2008).

123
50 W. Norman

accustomed to complying with myriad mandatory govern- unintended consequences are devilishly difficult to pre-
ment regulations. Firms know how to do this; so they can dict), and many to regret outdated or poorly designed
extend this kind of knowledge to the realm of beyond- regulations still on the books. Every business leader knows
compliance standards (many of which may, after all, have a examples of regulations that cost society (particularly his
business case as part of their rationale). Of course, being or her firm and/or its customers) more than it gains; that
realistic about self-regulation, also involves taking long- ignore the diversity of businesses and production processes
recognized shortcomings of the approach seriously. As within a given sector, which become increasingly complex
noted already, self-regulation can consist of high-minded over time; and that respond slowly to technological inno-
goals and aspirations on paper that do not change behavior, vation. We also know that governments often cannot keep
and which are vague enough that failing to ‘‘comply’’ is up with credible monitoring of many of their regulations—
hard to detect. There is a small body of empirical literature as we seem to learn every time unsafe food or medicines
in the realm of business ethics and compliance that casts begin taking a toll. And of course, we know that in an
doubt on the true impact of self-regulation when there are increasingly globalized economy, national governments
no legal sanctions22 (although this criticism is less relevant have little to say about their firms’ operations in developing
to many forms of industry-wide self-regulation and polic- economies, where governments may have little capacity to
ing since these can have serious consequences for a firm— make appropriate regulations or to enforce them. This is
say, being thrown off a stock exchange, or being unable to obviously just the most cursory summary of the potential
bid for defense contacts). There are also worries that self- shortcomings of government regulation. But it does also
regulation, especially in industry-wide regimes, can be highlight some of the advantages of self-regulatory para-
used to shore up anti-competitive practices and impose digms, particularly when they are bound closely to part-
barriers to entry.23 nerships between firms, NGOs, and governments.25 It is not
It would be easy to say that all of these are criticisms of a pale imitation of the ‘‘real thing’’ in some cases, but a
bad self-regulation, rather than of self-regulation per se. genuine improvement.
And we need hardly emphasize that the most pervasive Now, once again, we need not object to companies that
criticism—that self-regulation is a kind of window-dress- genuinely maintain standards ‘‘above and beyond the law’’
ing that pales in comparison to the ‘‘real thing’’—surely from describing themselves, or being described, in terms of
applies at least as well to the other paradigms of beyond- CSR, corporate citizenship, or sustainability, say. Our point
compliance ethics (CSR, corporate citizenship, and the lot) is about justificatory tools and also, in the examples
that we are trying to rethink. But by offering clearer described in this section, about managerial and institutional
standards and targets, earnest self-regulation does have the frameworks. Successful development and implementation
virtue that it can lend itself to being reinforced by gov- of ‘‘CSR’’ practices in business firms will generally involve
ernments in ways that avoid the most heavy-handed fea- maintaining these standards using the same kinds of
tures of government regulations themselves. The state can structures, procedures, and infused corporate culture that
mandate reporting of internal regulatory plans, publicize the firm uses to ensure compliance with laws and regula-
self-regulatory performance, facilitate the professionaliza- tions. Or to put it another way, when a firm does not
tion of regulatory officers (the way it did with financial integrate tightly its methods for meeting compliance and
auditors long ago), study the impact of private self-regu- beyond-compliance standards, we are much more inclined
lation, empower NGO watchdogs with official monitoring to see the latter as less-than-serious commitments.
rights and duties, and of course maintain a credible threat
of mandatory regulation if self-regulation fails.24
This last point brings up a powerful argument for self- Self-Regulation as a Normative Approach to Business
regulation in a fairly concrete form—that is, in a form that Ethics
the state itself can recognize and respect. There are plenty
of occasions where market failures cry out of some kind of The last section discussed self-regulation as a kind of
regulation, or literally provoke calls for governments to institutional and practical response to the challenge of
intervene. But, again, although market failures are often making businesses more responsible and markets more
sufficient to get the argument for regulation going, they effective (and thankfully, there really is now quite a well-
do not settle the matter. There are in fact many reasons developed literature on this). In this section, we shift back
to hesitate in creating new regulation (since perverse, to our primary purpose in this article, which is not about
the institutions of self-regulation, but about why the
22
Weaver et al. (1999).
23
Vogel (2005, Chap. 2) and Reinhardt (2005). 25
Eberlein and Matten (2009, pp. 242–245) and Buthe and Mattli
24
This list is adapted from Balleisen (2010). (2011).

123
Business Ethics as Self-Regulation 51

concepts and tools used in advanced regulatory policy economy as a whole’’ (Heath 2006, p. 550). Governments
should also inform our ethical theories for evaluating, try to prevent market failures that would allow firms to
condemning, and recommending business practices and make a profit without contributing to the efficiency
norms. Let us finish now with some more specific sug- properties of the market; and where they cannot, firms
gestions on how this might work, along with some ques- have an ethical, beyond-compliance, obligation to avoid
tions for further consideration and research. creating or exploiting market failures themselves. In
The idea of ‘‘business ethics as self-regulation’’ could be Heath’s words: ‘‘the ethical firm does not seek to profit
considered a friendly amendment to Joseph Heath’s from market failure’’ (Heath 2006, p. 550).
‘‘market-failures approach to business ethics,’’ which was Another way to illustrate the consistency of this ‘‘market
outlined in his instant-classic article, ‘‘Business Ethics failures’’ approach to business ethics with the basic logic
Without Stakeholders’’ (2006). Heath distinguishes two and rationale of both the market and its regulation is to
ways a firm can make a profit in a market economy: by consider the sorts of arguments that business leaders might
socially preferred strategies such as making a better legitimately make to resist proposals for new regulations
quality product for a better price or by non-preferred (or to demand the reform or repeal of existing regulations).
strategies, which might involve externalizing your costs of As noted, regulation can be a rather blunt tool. And busi-
pollution, or selling products with hidden defects.26 (Both ness leaders are often willing to recognize the seriousness
of these short lists of preferred and non-preferred strategies of some particular market failure, such as their emissions
could be greatly expanded.) The intuition is obviously to or the dangers of their product to consumers or third par-
draw a distinction between, on the one hand, businesses ties. But they may nevertheless want to resist a proposed
that succeed in the market place ‘‘fair and square’’ because regulation on the grounds that it will cost society more than
they do a better job of consistently bringing a quality it will save (say, as measured by the regulatory agency’s
product or service to market at a good price; and on the own cost-benefit analysis metrics). Now in making such a
other hand, businesses that succeed with strategies that case publicly, it would also surely behoove business lead-
would undercut such firms by, say, violating the ‘‘spirit’’ of ers to recognize the obligation to do something to reduce
existing regulations (concerning, e.g., pollution, worker the market failure themselves. The government’s industry-
health and safety, consumer protection), if not the ‘‘letter,’’ wide regulation may be too blunt; but that just shifts the
through political favors or influence peddling, deceiving obligation onto individual firms (perhaps in conjunction
regulators or consumers, etc. In short, it is a distinction with their industry association) to find sharper, more
between firms that succeed fairly in market competition effective, ways of dealing with the same problem. Or put
and firms that succeed by exploiting loopholes created by another way, if firms in the marketplace cannot solve their
market failures and government failures. As Heath argues, collective action problem, which encourages some firms to
‘‘defect’’ and adopt sharp or irresponsible (though legal)
Ideally, the only way that a firm could make a profit
practices, and which makes it hard for others not to follow
would be by employing one of the preferred strate-
if they want to compete, then they are practically inviting
gies. However, for strictly practical reasons, it is
regulation—even if that means regulation that will be
often impossible to create a system of laws that
more costly to all parties than some alternative standard
prohibits the non-preferred ones. Thus according to
and framework they may have been able to devise for
the market failures perspective [for business ethics],
themselves.
specifically ethical conduct… consists in refraining
A considerable virtue of this market-failures approach to
from using non-preferred strategies to maximize
business ethics is that it is an ethics tailored specifically for
profit, even when doing so would be legally permis-
an institution (the market) that has been designed to be
sible. (Heath 2006, p. 550)
deliberately adversarial. [Heath (2007) develops this
What is most interesting about this ‘‘foundation’’ for rationale explicitly at greater length]. There are, of course,
business ethics is that it is wholly consistent with the basic other ways a state can decide to have its goods and services
normative foundation for both free markets and the produced that do not involve competitive markets (though
regulation of markets. As Heath puts it, ‘‘profit is not some experiments with centrally planned, ‘‘officially’’ non-
intrinsically good. The profit-seeking orientation of the adversarial, institutional models have not been particularly
private firm is valued only because of the role that it plays successful); and there are certain goods and services that
in sustaining the price system, and thus the contribution the state may decide not to have delivered through the legal
that it makes to the efficiency properties of the market market system (addictive recreational drugs, prostitution,
policing, criminal justice). But the markets we are gener-
26
Heath (2006, p. 550). In this discussion, Heath approvingly cites ally looking at when we are thinking about business ethics
Arrow (1973, pp. 303–317) for a similar distinction and rationale. are deliberately adversarial. Rather than anointing one firm

123
52 W. Norman

to provide the product or service in the most socially give rise to special obligations for the players (namely,
responsible way, all things considered (as we do, in effect, market failures and other direct harms), and some ways of
when we set up a municipal police force or a public school determining realistic upper-limits on those obligations (in
board), we invite multiple firms to enter an arena in which the form of legal or ethical norms that all players are
they compete with one another to provide the products or expected to maintain in order to eliminate, or minimize the
services. Now the full justification of this kind of system is damage of, the market failures). This is more than can be
a field unto itself—political economy. The point worth said for most other frameworks that have been imported
emphasizing here is that we expect well designed and into business ethics, including some forms CSR and some
regulated markets, in Adam Smith’s famous words, to forms of utilitarianism, which have no inherent ways of
‘‘promote an end’’ and ‘‘the interests… of the society’’ in drawing careful distinctions between, for example,
all sorts of ways that need not be the ‘‘intention’’ of par- (i) activities or omissions that are unfortunate but not
ticipants in that market.27 In contemporary parlance, we ethically forbidden, (ii) activities or omissions that are
design deliberately adversarial institutions like markets, either obligatory or forbidden, and (iii) activities that are
sports, criminal legal procedures, and democratic electoral permissible and beneficial, but not obligatory.
systems in order to produce ‘‘positive externalities’’ even But while Heath’s market-failures approach to business
where these were not intended or sought directly by the ethics fits neatly with the basic logic of both the market and
players in these competitive forums. If these deliberately market regulations, it is also, potentially, even more
adversarial institutions are justified—that is, if we think unrealistic as a guide to business decision-making than the
they are really the best way to ‘‘deliver’’ certain ‘‘goods,’’ most idealistic models of stakeholder theory or CSR. Put
and are not just an unfortunate second-best option to a simply, it is hard to know what to make of Heath’s sim-
feasible non-adversarial institution—then the ethical duties plified maxim ‘‘the ethical firm does not seek to profit from
and rights of various ‘‘players’’ in these institutions will market failure.’’ Let us assume that this maxim implies that
differ from those in other walks of life. We normally profiting, or seeking to profit, from market failures is, to at
expect an ethical person to be cooperative, for example, but least some degree, unethical. The problem, again, is that
we actually make it illegal for rival businesspeople to market failures are endemic in virtually all modern markets
‘‘cooperate’’ in various ways, because cooperative price- and sectors. In any non-commodity-producing sector,
fixing will decrease or wipe out the positive externalities markets diverge significantly from the ‘‘perfectly compet-
created when they have to compete. We expect a good itive’’ markets of economics textbooks:
citizen to report criminal activity to the proper authorities,
• there are usually not an indefinitely large number of
and we want a justice system that convicts the guilty and
sellers (many major industries are oligopolies, in many
does not convict the innocent; but we do not want an
cases with one or two firms holding significant market
accused man’s lawyer to aid in his prosecution simply
power);
because she knows for sure that he is guilty. We actually
• there are significant barriers to entry into most major
want her to go to great lengths—within the rules governing
industries, at least as a serious player;
the adversarial legal system—to get him acquitted; because
• the products sold within a given industry are often far
we believe an adversarial legal system with this fiduciary
from identical and interchangeable (how many iPhone
duty for defense attorneys will ‘‘deliver’’ more justice, and
users or Toyota drivers would willingly swap for
less injustice, in the long run.
another smartphone or a Ford with similar ‘‘specs’’?);
Heath’s market-failure approach to business ethics
• information of both buyers and sellers is far from
engages directly with the deliberately adversarial nature of
perfect; and typically there are huge information
the market system in a way that other approaches do not. It
asymmetries, with manufacturers knowing much more
thinks about ethics as a way of improving a competitive
about their products than they are willing to divulge.
system that can never have a perfect set of rules, or a
Indeed, keeping this information ‘‘proprietary’’ may be
flawless way of monitoring compliance. ‘‘[T]he competi-
necessary for their very survival.
tive environment licenses a greater range of ‘self-inter-
ested’ behavior, but also imposes its own constraints on the Put bluntly, all major firms derive a certain—and often
strategies that firms may adopt in the pursuit of their significant—percentage of their earnings by exploiting
interests’’ (Heath 2007, p. 359). In addition, it identifies a market failures: do we really want to conclude that they are
relatively constrained set of problems that can potentially all to that extent necessarily unethical? Surely not. Some of
these market failures, after all, might actually be in place
27
because they help reduce other market failures or because
These are the ideas in the passage involving the famous (and only)
usage of the ‘‘invisible hand’’ metaphor in Smith’s Wealth of Nations,
they contribute to aggregate welfare. We have already
book IV, Chap. 2, paragraph 9. mentioned that one of the ethically preferred strategies for

123
Business Ethics as Self-Regulation 53

business success is to be more innovative than your failures. (By ‘‘pernicious’’ market failures, we might think
competitors: to improve products and find ways to make of the kinds of things that even non-economist citizens will
and sell them more inexpensively. But in order to foster recognize as irresponsible: polluting in ways that genuinely
this kind of innovation, we have to protect against the kind leave third parties worse off, duping consumers, collecting
of free riding that destroys public goods (another classic and selling personal information from Internet users with-
market failure) by granting patents (and thus monopoly out their knowledge, stifling competition by buying up
rights to the use of the innovation, along with the right to competitors, and so on.) Citizens do not need a complicated
protect the information behind it). Or to give another moral theory to see that the exploitation of obviously
example, do we really want to say that it is always pernicious market failures is unethical. But the theory does
unethical for one firm in an oligopolistic industry (say help us to think through specific ways we might expect
airlines, or airplane manufacturing) to seek to merge with ethical firms to respond to these problems. And much of this
another? They will be increasing market power (a market process will involve engaging with the regulatory envi-
failure), but in some cases they may also create economies ronment. In order to identify obligations or evaluate a
of scale (another market failure!) that would improve business’s culpability in the face of some dubious business
overall social efficiency. In short, some market failures can practice, product, or strategy ‘‘X,’’ we might begin with a
only be addressed by creating others. And not all market series of questions like these:
failures seem to be intrinsically harmful.28 So surely we
• Is there already a regulation against X that is not being
cannot condemn all market failures, as at least some
enforced, or which the firm is successfully flouting?
interpretations of the simplified version of Heath’s princi-
• Is there a regulation against X for which the firm has
ple would have us do.
found a ‘‘loophole,’’ so that while not technically
How then do we preserve the intuitively appealing core
breaking the ‘‘letter’’ of the law, it is clearly violating
of the market failures approach to business ethics without
the ‘‘spirit’’ of the law?
expressing it in a principle with intuitively unappealing
• Although there is no law against X, are there clear rules
implications? (Or to paraphrase a dictum of John Rawls’s:
concerning X by industry associations or standard-
how do we get a principle that’s vaguely right instead of
setting bodies to which the firm has promised to
precisely wrong?) The answer, we believe, is to pan out
comply?
from the narrow concept of market failure to the broader
• If there is no law against X, why not?
landscape of regulation. We have already noted that the
existence of a specific market failure somewhere may be – Is it reasonably controversial whether X is really a
sufficient to prompt a discussion of about regulatory bad practice or something that even needs regula-
reform, but it does not necessarily justify a reform. So at tion? (That is, can reasonable people disagree about
the very least, we would want to limit Heath’s dictum so this the way they may, say, over the regulation of
that it is only unethical to exploit the kinds of market pornography or alcohol?)
failures that should be, but are not currently, well regu- – Is X so novel that the law hasn’t caught up?
lated. But even that is not quite right. If highly ethical firms – Would it be difficult to formulate a regulation
unilaterally imposed large costs on themselves, or chose to because X is so amorphous or mutable (the way,
forgo sales and rents that relied on exploiting a market say, it is difficult to define exactly what constitutes
failure, they would in many cases go out of business. (Or an untruth in advertising)?
put another way, most firms would have a difficult time – Is the political will to create a law or regulation
raising capital if they disclosed to potential investors that lacking?
they would not engage in standard practices in their – Is the political process too slow or too preoccupied
industry that exploited market failures.) with more pressing matters that lawmakers have
Instead, we can think of the ‘‘market-failures approach’’ simply not been able to get an obviously needed
or the ‘‘self-regulation approach’’ to business ethics as regulation concerning X on the books?
helping us make some compelling arguments for very – If X itself seems obviously nasty, are practices of its
specific business strategies in the face of pernicious market general type protected by some fundamental con-
stitutional right (say, freedom of speech) that
trumps legislation or regulation?
– Has it been reasonably judged by government
28
As Tyler Cowen and Eric Crampton note, ‘‘The term ‘market agencies and independent investigators alike that
failure’ is prejudicial—we cannot know whether markets fail before
any standard way of seriously regulating X would
we actually examine them’’ (2002, p. 24). Put another way, markets
with ‘market failures’ in them are not necessarily markets that are cost all parties (or society) more than it would
failing. benefit them?

123
54 W. Norman

– Does the best explanation for why there is no law compelling reply to highlight the resources they have
against X involve a successful public relations devoted to ensuring that the laws would not be too strin-
campaign by the firms involved in X? gent. If they defend the legitimacy and the content of the
– Does the best explanation for why there is no current regulations (say, with a respectable cost-benefit
regulation of X involve a successful lobbying analysis), then one can evaluate that claim in a forum
campaign of elected officials and their staffs, along where there are highly developed procedural and substan-
with generous campaign donations to ‘‘friendly’’ tive guidelines for debating appropriate forms and levels of
politicians? regulation. If we believe the laws and regulations are too
– Does the best explanation for why there is no law lax because industry players have in various ways ‘‘cor-
against X involve a successful lobbying campaign rupted’’ the legislative or regulatory process, then it is
directed at the relevant regulatory agency, one that highly relevant to make that case—whether in an attempt
follows years of successful attempts by firms in the to shame the firms or public officials, or to propose a
sector to ‘‘capture’’ the agency? reform of the process. If firms concede there is a problem
with X, but argue that the regulations are already too strict,
Without looking at specific examples or illustrations at this or that more regulation would be too costly for all con-
point, we can see how various answers to questions like cerned, then there is an exceedingly strong case for them
these will lead us toward some fairly specific normative agreeing to take on the obligation, singularly or collec-
recommendations—all of which are intimately linked to tively, to find efficient and accountable ways to self-
ideals about justifiable regulations or regulatory processes. regulate.
The root principle will not be: ‘‘Thou shalt always Now obviously, this way of engaging in a normative
unilaterally refrain from exploiting the legally profitable institutional debate in the language of regulation is still
opportunities from activity X, when X involves a market rather vague and impressionistic. After all, we have con-
failure.’’ But we can argue that profiting from X under structed some questions and an imaginary debate that could
some of the scenarios described above is much more be asked of a very broad range of products, services,
blameworthy than under some others. In certain cases, for practices, and business strategies. But it still compares
example, we might want to think of the duty not as ‘‘the favorably, even at this level of generality, to a number of
duty to refrain from X,’’ but rather as ‘‘the duty to engage other ways business ethicists have proposed we talk about
constructively with state and non-state regulatory pro- these things. For example, we might say of X that it is
cesses, industry competitors, and other stakeholders, to find perfectly legal but that harms one of the firm’s stakeholder
ways of dealing with the harms associated with X’’—or as groups to the benefit of shareholders. And this might
the very least ‘‘the duty not to engage destructively with indeed be true. But where do we go from there? Stake-
attempts by governments and others to find reasonable holder theory notoriously has no generally agreed formula
regulatory solutions.’’ or procedure for telling managers how to balance those
Now this kind of focused normative advice may still be harms and benefits. Should the harmed group be compen-
very ‘‘unrealistic,’’ in the sense that in many industries— sated even if they could not successfully sue for such
and not just Big Tobacco—all of the major firms work compensation? What if the employees also benefit, and if
diligently to prevent or reduce the regulation of their many would lose their jobs if the managers decided to
industry’s market failures. But it is not the point of business redistribute benefits and costs in a way that reduced the
ethics to be realistic in that way. What we want is a nor- harm for that unfortunate stakeholder group? How in
mative framework that allows us to evaluate where, principle and in practice does one go about answering these
throughout the entire business system, things are going questions? And why do we want to focus on the decisions
well or going badly; and then to consider what steps might of the managers or board of a single firm if all the firms in
be taken to improve the system. It is also a virtue of a that sector are involved with practices or products like X?
normative theory that it enables us to engage with the best Approaching the very same problem in the language of
arguments our opponents might use to defend themselves. regulation and self-regulation has distinct advantages: (a) it
And this approach does that because it is based on a helps us locate the source of the problem, and the institu-
rationale for free markets that is shared by, if not always tions most likely to be involved in a solution at the right
well understood by, the kinds of opponents who often want ‘‘level’’ (governments, regulatory agencies, courts and tri-
to resist the use of regulation or voluntary self-regulation bunals, industry associations, NGOs and standard-setting
that will put one firm at a competitive disadvantage. If a associations, industry associations, the firm along with its
corporate leader in the face of criticism throws up her arms board, managers, and contractually related stakeholder
and explains that they have done nothing wrong because groups, etc.); and (b) it can take advantage of well
they have obeyed all federal, state, and local laws, it is a known, widely used—if not always perfect—processes and

123
Business Ethics as Self-Regulation 55

standards for developing fair and efficient rules, and for technically a market failure or not. We should also leave
measuring compliance. It is not unhelpful to identify open the possibility that people will find some products,
stakeholder groups, constituencies, or individuals whose services, and advertisements to be unethical because they
interests are affected by a firm’s activities. But the regu- are, say, sinful, tasteless, vulgar, or offensive (perhaps
latory approach to business ethics helps us to move beyond culturally or religiously insensitive), and in all countries
a mere clash of interests to identify specific obligations and there are commercial activities that are regulated to a
rights. A happy consequence of this way of thinking greater or lesser degree on these grounds. Some of the
through business ethics issues is a substantial reduction of offence provoked by these activities could be considered a
the normative asymmetry discussed earlier in this article. ‘‘negative externality,’’ but that baldly utilitarian way of
Our arguments for why a given regulation is appropriate, taking this ‘‘moral harm’’ into account does not quite do
fair, or just, on the one hand, and for why a firm does or justice to the complexity of the arguments for or against
does not have certain obligations to adhere to norms that such regulations. And finally, speaking of the utilitarian
are more stringent than the regulations, on the other hand, underpinning of the efficiency arguments for the regulation
are articulated and justified using many of the same con- of market failures, we must bear in mind that the main aim
cepts and methods. of markets in this paradigm is to maximize the size of the
The focus on the institutions of regulation and self- pie, so to speak. It is assumed that governments can then
regulation is meant to be a friendly amendment to Heath’s decide how to carve it up and redistribute portions of it. But
market-failures approach to business ethics. I do not it is also wholly conceivable that the state can regulate
believe that he need object to anything I have added in some aspects of commerce for distributional purposes
recasting it in this regulatory language. We will not spec- rather merely for efficiency. Citizens may not like the way
ulate about his receptiveness to two other problems with a free market determines wages—whether for CEOs, con-
the way he binds business ethics to market failure. First, for venience-store clerks, or for men and women with the same
reasons that should be obvious from the list of questions qualifications doing the same job—and they may vote for
earlier in this section, a full examination of business-gov- governments that would regulate these labor markets on
ernment relations needs to look as closely at failures and fairness grounds rather than because of (or in addition to
imperfections in government, politics, and the legal system there being) a market failure.
as it does at failures in the market per se. Many market We might say that the core of Heath’s market-failures
failures are created, or allowed to persist, by state regula- approach is that firms have obligations to observe certain
tors who are typically in ‘‘close consultation’’ with the beyond-compliance norms, and that these obligations are
firms in the market. based on the same criteria we have for justifying legal
Second, as important as the correction or control of ‘‘compliance’’ norms. And since those legal norms can
market failure is as a justification for regulation, it is not legitimately be based on considerations that go beyond
the only rationale or justification for regulation. Markets market failure, we should expect that the beyond-compli-
facilitate activities and products that are undesirable in ance norms can be as well. Taking the deliberately
ways that do not always squeeze comfortably into the very adversarial nature of the market seriously, we find it prima
specialized technical categories of market failures. It is not facie unethical for firms to try to gain competitive advan-
clear, for example, that firms systematically and profitably tage by ignoring legitimate norms, whether they are
discriminating against employees or customers on the basis grounded in market failure, government failure, consider-
of race or sexual orientation are ‘‘exploiting a market ations of justice, public decency, or what have you.
failure’’ in the economist’s sense. But we would still want
to call this unethical and to make it illegal (at least for a
range of cases). Or consider the manipulation of custom- Conclusion
ers’, employees’, or investors’ cognitive biases or irrational
tendencies in order to get them to willingly do things that We reiterate that our proposal and argument here has been
are not in their interests. This also does not technically look directed primarily to those who are currently dissatisfied
like a market failure problem since those models assumed with some of the more widely discussed ways of thinking
something like perfect rationality and focused instead on about the justification of beyond-compliance obligations in
information asymmetries rather than, if you will, asym- the scholarly field of business ethics—so-called stake-
metrical abilities to process information. Although some holder theory, in particular, but also the paradigms of
kinds of regulation may qualify as ‘‘paternalistic,’’ we still corporate citizenship or corporate social responsibility.
want to leave open the possibility of regulation that will There are already powerful and compelling critiques of
curb the exploitation of easily manipulated and deeply those theories in the literature. We have rehearsed some of
ingrained cognitive biases, whether their exploitation is the common themes in those critiques in order to illustrate

123
56 W. Norman

some attractive advantages of an approach to business from what it might be nice for them to do, even if they are
ethics that builds on the conceptual, normative, and polit- not obliged to do so, on the other. It is quite likely that
ical frameworks of regulation and self-regulation. This firms living up to the ethical and legal obligations gener-
framework points to both a range of institutional realms ated by this approach could deservedly be seen as ‘‘socially
where many of the common complaints about unethical or responsible,’’ as ‘‘exemplary corporate citizens,’’ and as
irresponsible business practices might best be addressed ‘‘stakeholder-friendly,’’ even if the duties they are fulfill-
(e.g., by ‘‘hard’’ or ‘‘soft’’ regulations on all firms in a ing, and the rights they are respecting, are justified on
sector that can be monitored and enforced, rather than by grounds independent of these popular frameworks and
merely voluntary, unilateral ‘‘social responsibility’’ initia- vocabularies.
tives by particular firms). But we have also argued that the
conceptual framework of regulation provides a useful Acknowledgments I have incurred an unusual number of intellec-
tual debts in the course of developing the specific ideas and arguments
language in which concerns about potentially irresponsible in this article. Most directly I am indebted to the Guest Editors of this
business practices can be debated constructively. In effect, issue of the Journal, along with the three anonymous referees, for
paradigms like stakeholder theory are very good for help- several valid criticisms and helpful suggestions. I must also thank
ing us to identify and describe potential harms and injus- directly Ed Balleisen for his comments on a very early draft of this
paper, but more importantly for his role in creating and launching the
tices, but the normative, political, and legal vocabulary of ‘‘Rethinking Regulation’’ group at Duke University, which has
regulation helps us to evaluate more systematically how informed so much of my multidisciplinary understanding of regula-
exactly stakeholder grievances ought to be addressed— tion. There is no doubt that the main lines of the theory I defend here
even in cases where the best answer is that they should be would never have occurred to me were it not for a long-running
conversation, and occasional collaborations, with Joe Heath. Many of
addressed not by state regulation but by self-regulation the arguments here have also evolved out of other enduring collab-
within a single firm, or co-regulation among the firms orations I have been fortunate enough to have with Chris MacDonald
in a sector along with, perhaps, NGOs for monitoring or and Pierre-Yves Néron.
training.
This ‘‘regulatory approach’’ to business ethics grows out
of Joseph Heath’s innovative ‘‘market failures approach,’’
References
and we proposed a number of mostly friendly amendments
to overcome potentially excessive errors in two directions: Abend, G. (2011). Historicizing business ethics: The origins of
on the one hand, it is naı̈ve, if not simply incoherent, to business ethics in American universities, 1902–1936. Unpub-
assume that it is always to a degree unethical to profit from lished manuscript. Department of Sociology, New York
market failures; and on the other, there is no reason we University.
Arrow, K. (1973). Social responsibility and economic efficiency.
should assume that all unethical business practices, or all Public Policy, 21, 303–317.
features of business we might need to regulate, can be Balleisen, E. (2010). The prospects for effective ‘co-regulation’ in the
explained adequately as market failures. United States: An historian’s view from the early twenty-first
It is no part of our claim that all issues in business ethics century. In E. Balleisen & D. Moss (Eds.), Government and
markets: Toward a new theory of economic regulation (pp.
can be addressed in regulatory language [it will do a par- 443–481). Cambridge: Cambridge University Press.
ticularly bad job, for example, dealing with individual Barley, S. (2007). Corporations, democracy, and the public good.
virtues and moral education, and in general for ethics Journal of Management Inquiry, 16(3), 201–215.
within the hierarchical, non-market, structure of a firm Boatright, J. (2006). What’s wrong—and what’s right—with stake-
holder management. Journal of Private Enterprise, 21(2),
itself—see Heath (2007, p. 369)]. Nor are we claiming that 106–130.
self-regulation is generally better than state regulation (or Boatright, J. (2011). Ethics and the conduct of business (7th ed.).
vice versa). But especially when it comes to large-scale Upper Saddle River, NJ: Prentice Hall.
questions about the ethics of a firm’s policies, practices, Bowie, N. (Ed.). (2002). The Blackwell guide to business ethics.
Oxford: Blackwell Publishing.
and strategies, our proposal aims to move us beyond the Braithwaite, J., & Drahos, P. (2000). Global business regulation.
recognition that stakeholders have clashing interests, or the Cambridge: Cambridge University Press.
fact that businesses considering themselves to be ‘‘good Brander, J. (1995). Government policy toward business (3rd ed.).
corporate citizens’’ or ‘‘socially responsible’’ can always Toronto: Wiley.
Brenkert, G., & Beauchamp, T. (Eds.). (2010). The Oxford handbook
point directly to a number of good deeds they have of business ethics. Oxford: Oxford University Press.
accomplished, even if they cannot really aggregate these Buthe, T., & Mattli, W. (2011). The new global rulers: The
good deeds (along with any bad deeds) into a ‘‘social privatization of regulation in the global economy. Princeton,
bottom line’’ (Norman and MacDonald 2004). Business NJ: Princeton University Press.
Carroll, A. (1991). The pyramid of corporate social responsibility.
ethics as self-regulation helps us to distinguish between Business Horizons, 34, 39–48.
what exactly we think firms are ethically obliged to do, Cowen, T., & Crampton, E. (2002). Market failure or success: The
above and beyond complying with laws, on the one hand; new debate. Northampton, MA: Edward Elgar.

123
Business Ethics as Self-Regulation 57

Crane, A., & Matten, D. (2008). Incorporating the corporation in May, S., Cheney, G., & Roper, J. (Eds.). (2007). The debate over
citizenship: A response to Néron and Norman. Business Ethics corporate social responsibility. Oxford: Oxford University Press.
Quarterly, 18(1), 27–34. McBarnet, D. (2007). Corporate social responsibility beyond law,
Crane, A., & Matten, D. (2010). Business ethics (3rd ed.). Oxford: through law, for law. In D. Barnet, A. Voiculescu, & T.
Oxford University Press. Campbell (Eds.), The new accountability: Corporate social
Crane, A., Matten, D., & Moon, J. (2008). Corporations and responsibility and the law (pp. 9–56). Cambridge: Cambridge
citizenship. Cambridge: Cambridge University Press. University Press.
Donaldson, T., & Dunfee, T. (1999). The ties that bind: A social Néron, P. (2010). Business and the polis: What does it mean to see
contracts approach to business ethics. Cambridge, MA: Harvard corporations as political actors? Journal of Business Ethics,
Business School Press. 94(3), 333–352.
Eberlein, B., & Matten, D. (2009). Business responses to climate Néron, P., & Norman, W. (2008a). Citizenship Inc.: Do we really
change regulation in Canada and Germany: Lessons for MNCs want businesses to be good corporate citizens? Business Ethics
from emerging economies. Journal of Business Ethics, 86, Quarterly, 18(1), 1–26.
241–255. Néron, P., & Norman, W. (2008b). Corporations as citizens: Political
Economist, The. (2005, January 20). Survey: Corporate social not metaphorical. Business Ethics Quarterly, 18(1), 61–66.
responsibility. Norman, W. (2012a). Business ethics. In H. LaFollette (Ed.),
Ethics and Compliance Officer Association. (2008). The ethics and International encyclopedia of ethics. Hoboken, NJ: Wiley.
compliance handbook: A practical guide from leading organi- Norman, W. (2012b). Stakeholder theory. In H. LaFollette (Ed.),
zations. Boston: Ethics and Compliance Officer Association International encyclopedia of ethics. Hoboken, NJ: Wiley.
Foundation. Norman, W., & MacDonald, C. (2004). Getting to the bottom of
Evan, W., & Freeman, E. (1988). A stakeholder theory of the modern ‘triple bottom line’. Business Ethics Quarterly, 14(2), 243–262.
corporation: Kantian capitalism. In T. Beauchamp & N. Bowie Ogus, A. (1995). Rethinking self-regulation. Oxford Journal of Legal
(Eds.), Ethical theory and business. Englewood Cliffs, NJ: Studies, 15, 97–108.
Prentice Hall. Orts, E., & Strudler, A. (2009). Putting a stake in stakeholder theory.
Ferrell, O., LeClair, D., & Ferrell, L. (1998). The federal sentencing Journal of Business Ethics, 88, 605–615.
guidelines for organizations: A framework for ethical compli- Paine, L. (1994). Managing for organizational integrity. Harvard
ance. Journal of Business Ethics, 17, 353–364. Business Review, 72, 106–117.
Freeman, E., & Evan, W. (1990). Corporate governance: A Paine, L. (2003). Value shift. New York: McGraw-Hill.
stakeholder approach. The Journal of Behavioral Economics, Rawls, J. (1971). A theory of justice. Cambridge, MA: Harvard
19(4), 337–359. University Press.
Freeman, E., Harrison, J., Wicks, A., Parmar, B., & de Colle, S. Reinhardt, F. (2005). Environmental protection and the social
(2010). Stakeholder theory: State of the art. Cambridge: responsibility of firms. In B. Hay, R. Stavins, & R. Vietor
Cambridge University Press. (Eds.), Environmental protection and the social responsibility of
Friedman, M. (1962). Capitalism and freedom. Chicago: University firms: Perspectives from law, economics, and business. Wash-
of Chicago Press. ington, DC: Resources for the Future.
Garvin, D. (1983). Can industry self-regulation work? California Scherer, A., Palazzo, G., & Baumann, D. (2006). Global rules and
Management Review, 25(4), 37–52. private actors—towards a new role of the TNC in global
Gibson, K. (2006). Business ethics: People, profits, and the planet. governance. Business Ethics Quarterly, 16(3), 505–532.
New York: McGraw Hill. Stiglitz, J. (2010). Government failure vs. market failure: Principles
Gond, J.-P., Kang, N., & Moon, J. (2011). The government of self- of regulation. In E. Balleisen & D. Moss (Eds.), Government and
regulation: On the comparative dynamics of corporate social markets: Toward a new theory of economic regulation. Cam-
responsibility. Economy and Society, 40, 640–671. bridge: Cambridge University Press.
Heath, J. (2006). Business ethics without stakeholders. Business Sunstein, C. (2002). Risk and reason. New York: Cambridge
Ethics Quarterly, 16(4), 533–557. University Press.
Heath, J. (2007). An adversarial ethic for business: Or when Sun-Tzu Sunstein, C. (2009, February 26). What kind of regulation czar?
met the stakeholder. Journal of Business Ethics, 72(4), 359–374. BusinessWeek.
Heath, J., Moriarty, J., & Norman, W. (2010). Business ethics and (or Viscusi, K., Vernon, J., & Harrington, J., Jr. (2005). Economics of
as) political philosophy. Business Ethics Quarterly, 20(3), regulation and anti-trust (4th ed.). Cambridge, MA: The MIT
427–452. Press.
Heath, J., & Norman, W. (2004). Stakeholder theory, corporate Vogel, D. (2005). The market for virtue: The potential and limits of
governance, and public management. Journal of Business Ethics, corporate social responsibility. Washington, DC: The Brookings
53, 247–265. Institution Press.
Jones, T., Wicks, A., & Freeman, E. (2002). Stakeholder theory: The Weaver, G., Trevino, L., & Cochran, P. (1999). Corporate ethics
state of the art. In N. Bowie (Ed.), Blackwell guide to business policies of the mid-1990s: An empirical study of the Fortune
ethics. Oxford: Blackwell. 1000. Journal of Business Ethics, 18, 283–294.
Marcoux, A. (2003). A fiduciary argument against stakeholder theory.
Business Ethics Quarterly, 13, 1–24.

123