Employee Responsibilities and Rigjits Journal, VoL 4, No. 1, 1991

The Fusion of Privilege and Power:ESOPs in Theory and Practice

Craig P. Dunn and Catherine M. Daily^

The heart of this paper is an examination of the rights of employees, owners, and thecorporation. The modem corporation is characterized by the conflict that ensues whenownership and control are independent. Employee stock ownership plans (ESOPs), intheory, serve to realign these disparate interests between the owners and managers ofthe firm. This article will explore the mechanisms by which ESOPs serve to empowerthose who possess ownership rights in the corporation. The application of trusteeshiptheory serves to explain the agency problem that may arise when managers serve asboth trustee and beneficiary. Workplace, ownership, and corporate rights are integratedinto a stakeholder perspective of rights conflicts.

KEY WORDS: employee rights, ESOPs, trusteeship.

INTRODUCTION

During the past decade there has been a dramatic increase in the number ofemployee stock ownership plans (ESOPs), with over 8,000 programs in force at thetime of this writing. "[T]he development of most organizations can be outlined asa series of right-conferring agreements made between a variety of participants ata variety of times" (Keeley, 1988, p. 32). In principle, such plans represent a fun-damental shift in organizational right-conferring agreements referred to by Keeley.Employee participants in ESOPs gain an entirely fresh genre of rights in light oftheir ownership position in the employing firm; in addition to whatever rights theymight hold by virtue of their employment contract, workers having an equity posi-tion in the firm hold a distinct set of ownership rights. Given this new formulation,what has been most curious about a number of ESOP arrangements has been thedecided lack of substantive difference(s) in the organizational power structure oc-casioned by ESOP inception. This article will explore the variety of reasons behindthis apparent failure of rights to beget power.

'Department of Management, Graduate School of Business, Indiana University, Bloomington, Indiana47405.

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0892-7545/91/03OO-0O61$06.50/0 © 1991 Plenum Publishing Corporation

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The notion of conflict will prove central to such an examination. While re-search into organizational conflict has tended to focus upon rivalry betweenemployees and managers (Borys, 1989; Wilson, 1989; Koys, 1988; Tjosvold, 1988;Kirby, 1985), of greater relevance to the current analysis will be scholarship focusingupon the conflict between the interests of shareholders and managers, for in a num-ber of cases it is just such conflict that has had the (unintended) positive effect ofsecuring employee entitlements. The reasoning, while complex, is straightforward.Over 50 years ago, Berle and Means (1932) suggested that under conditions ofdiffuse stock ownership managers tend to operate the firm in their own interest(s)rather than for the benefit of the firm's stockholders. One manifestation of suchself-interest has been the managerial tendency to be more concerned withsafeguarding their own position(s) within the organization than with maximizationof shareholder wealth. As aberrant as it may sound, the ESOP has often proventhe primary mechanism supporting managerial entrenchment. Theoretically, bygranting workers an ownership position in the firm, ESOPs tie employee rewardstructures to the fortunes of the corporation. However, in practice it has often beenthe case that managers have control —either direct or indirect —over the voting dis-position of ESOP shares.

This observation cuts to the heart of the current dilemma —r/ie inherent prob-lem of trusteeship. As numerous organizational writers have observed (see, e.g.,Bruner & Paine, 1988; Houston & Howe, 1987; Heard, 1986), managers have aclear-cut fiduciary duty to operate the firm for the benefit of the corporation'sowners—who, in the case of ESOPs, include the employee participants. This respon-sibility to act on behalf of the owners of the firm's capital stands in direct oppositionto the most fundamental of economic tenets —that mankind is hopelessly self-serv-ing. The battle between ownership interests, or rights, on the one hand andmanagerial self-interest on the other has been dubbed the "agency problem" withinthe literature of financial economics (see, e.g., Fama & Jensen, 1983(a), 1983(b);Fama, 1980; Jensen & Meckling, 1976). However, a closer examination of the"agency problem" will reveal that its origins can be traced back to the groundingof corporate law in trusteeship theory centuries ago. A full explication of just whyrights do not necessarily imply power would prove futile in the absence of the recog-nition that trusteeship allows for stripping the "use and enjoyment" privileges ofproperty ownership from said property's legal title. The stakeholder managementframework extends the property ownership view by recognizing both workplace andcorporate rights. Before advancing just such a rich understanding of employeeresponsibilities and rights, however, further development of the theoretical supportfor ESOPs as employee empowerment mechanisms needs to be undertaken.

TRUSTEESHIP

The institution of trusteeship is inseparable from the concept of fiduciaryresponsibility. One is a fiduciary, or trustee, when occupying "a position of trust orconfidence in relation to another person or his property" (Corley & Robert, 1975, p.960). If the trustee's self-interest is closely wed to the interest(s) of the trustor and/or

Fusion of Privilege and Power **3

the beneficiary, no grounds exist for conflict between the trustee's interests and his/herfiduciary duty. The fact that volumes have been written concerning fiduciary respon-sibility suggests that this is not the usual case. Given that corporate ownership is dif-fuse, the trusteeship role of those in governance is amplified. Under these conditions,managers have a clear obligation to act as the representatives of a diversity of owner-ship interests, admittedly a difficult task (Dunn, 1989). Given that the trustee ischarged with fulfilling duties that regularly run counter to the dictates of self-interest,trust is best conceived of as a moral phenomenon.

There is an interesting twist to trusteeship theory which warrants elaboration.For centuries transfers of property that split legal title from its beneftcial use haveenjoyed the force of law (Fraher, 1989). In the early 1200s certain newly foundedmendicant orders, the most notable of which being the Franciscans, applied thisprinciple to their advantage. By appointing lay trustees to oversee the dispositionof Church offerings, the friars were able to fulfill the letter of their vows of poverty(by not taking legal title to property), while at the same time positioning themselvesas the beneficiaries of the use and enjoyment of such gifts. Collectively, the friarsbecame a corporate entity organized under a charter granted by the sovereign:

. . . ecclesiastical property-holding [thereby] gave birth to modern corporation theory. Intrying ID explain the roles of bishops, lower clergy, and laity, medieval lawyers ultimatelydecided that each church was an entity distinct from the persons who made up the church.The fictional person, the corporate entity, theoretically lived forever, and theoretically thisfictional person had property rights and interests of its own. Vis-il-vis the corporate church,the clergy were agents . . . subject to flduciary duties. Hence the direct conveyance to thechurch ultimately produced legal rules that look to the modern reader like a combinationof corporation law and trust law (Fraher, 1989).

When trusteeship is framed within the organizational context, it becomesreadily apparent that the fiduciary relationship between manager and owner im-plicitly allows for the possibility of use and enjoyment privileges being appropriatedby managers for their own benefit —with legal title to such property remaining resi-dent in the hands of corporate shareholders. Managers often find themselves in anuntenable position: they are both trustees for the interests of enterpriseshareholders and, within their role as corporate employees, beneficiaries of theirown trusteeship dispositions. Couple this conflict with the observation thatmanagers possess gross power within the modern corporation and it becomes ap-parent that the manager's choice of whether or not to behave opportunistically islargely a function of his/her personal moral constitution. While the inherent prob-lem of trusteeship has been debated for literally centuries, the controversy hasrecently been reintroduced within the management literature under a fresh guise:"the agency problem."

CONFLICT AND THE "AGENCY PROBLEM"

The evolution of the modern corporation has given rise to concerns centeringupon the potential for conflict between the utility functions of corporate ownersand those of institutional managers (Williamson, 1985; Fama & Jensen, 1983; Berle& Means, 1932). Such concerns are the result of the widespread diffusion of owner-

64Dunn and Daily

ship characteristic of the modem corporation, and undergirded by the economicview of human nature: man is irretrievably self-interested. Given the twin conditionsof ownership diffusion and goal conflict between managers and owners, it has beenhypothesized that huge inducements are created for managers to breach theirfiduciary responsibility to the firm's owners in favor of operating the firm for theirown benefit. Williamson (1975) has recast the inherent problem of trusteeship asthe dilemma of moral hazard. Framed within the current context, inharmonious in-centives (i.e., incongruity of managerial rewards and shareholder objectives), whenconjoined with uncertainty, create sufficient conditions for managers to behave op-portunistically (i.e., to breach their trusteeship obligations).

A substantial body of empirical research has focused upon the performanceimplications of the separation of ownership and control. Consistent with the agencyhypothesis, it has been theorized that those firms characterized by highly diffuseownership will be poorer performers than their closely held counterparts —at leaston criteria appropriate to stockholder wealth creation. The separation thesis is not,however, clearly supported within the literature. Several reasons have been offeredfor the disparity of findings: the measurement of ownership and control has variedv/idely across studies, the role of managerial incentive structures has seldom beenexamined, the moral predisposition of managers has not been surveyed, the roleof institutional investors has not been assessed, and ownership design as a strategicdecision has been ignored (Dunn, 1988). Such observations reveal that, while thegeneral hypothesis that ownership diffusion leads to poorer firm performance hasbeen explored with monotonous regularity, the assumptions underlying the globalthesis have been uncritically embraced. It is suggested that variance across sampleswith respect to these assumptions may well offer an explanation for the disparatefindings of the extant literature on the separation thesis.

Of critical importance to the current argument is the variable of ownership.Diffusion of ownership, while of paramount importance to the agency problemhypothesis, has not been a clearly formulated construct within empirical research.Conceptually the reasoning is clear: were ownership closely held, the costs to in-dividual investors of monitoring managerial behavior would be relatively small inrelation to the amount of their invested capital; conversely, when ownership is wide-ly held the costs of monitoring managerial activities become prohibitively expensive(Williamson, 1983). In theory at least, the effects of ownership diffusion can there-fore be ameliorated through a variety of collective ownership forms, the mostnotable of which are ESOPs. Such mechanisms serve to unite control in the handsof a few key ownership representatives. ESOP managers become trustees for theinterests of shareholder constituencies—and to the extent that subscribers to theESOP are themselves widely diffuse become subject to the same moral hazardfacing corporate managers.

EMPLOYEE STOCK OWNERSHIP PLANS

In theory, ESOPs have the potential to reverse the negative effects of owner-ship diffusion by reuniting corporate ownership and control (see Fig. 1). This

Fusion of Privilege and Power

I TTie 'Agency Problem* J I Managerial Self-interest J

If Conflict Between Interests of jI Managers and Owners J

( Efforts at |I Managerial Entrenchment J

I Hostile Takeover Attempt I

IFormation of 1

Employee Stock Ownership PlansI

(Unintended) Conferal ofEmployee Ownership Rights J

I Employee Empowerment I

Fig. 1. ESOP formation in theory.

capacity is derived from two equally forceful sources: power and rights. Within thestakeholder framework, stakeholders are defined as "any group or individual whocan affect or is affected by the achievement of the organization's objectives"(Freeman, 1984, p. 46). If any given constituency has the ability to affect the or-ganization, it is possessed of power (e.g., employees are clearly in the position toaffect firm processes). If the constituency is affected by the organization this con-stituency is the legitimate claimant of specific rights (e.g., employees are most direct-ly impacted by organizational actions). A defense for this assertion will be offeredin the section addressing ownership rights. While Freeman's stakeholder definitionincorporates those groups having either power or rights, the strongest claimants arepossessors of both power and rights.

Beyond their ability to resolve the confiict between managers and owners,ESOP formation also carries the potential to attenuate discord between managersand employees. To the extent that both managers and (other) employees have atleast a portion of their personal incentive structure tied to a shared reward, one

^^ Dunn and Daily

might reasonably expect these two groups to work together for their common good.An ownership position in the firm-through the mechanism of the ESOP-providesjust such a common goal. Ownership inspires (non)managerial employees to greaterlevels of personal and organizational efficiency, for each cost-saving move bears adirect and positive economic benefit for all employees, including themselves. Intheory, therefore, ESOP formation offers a systemic solution to the problem ofmanagement/employee conflict by institutionalizing self-interest through sharedownership of the firm.

The situation is complicated, however, to the extent that power is latent ratherthan active. Several conditions must be in place for power to be meaningful. Thefirst is simply that the possessors of power must realize that they in fact "own"such power. In the case of ESOPs, plan participants often are not cognizant of thepotential represented by their ownership position in the firm. The rights attendingstock ownership are typically not exercised, for most employees view their owner-ship position in the firm as an investment rather than as a mechanism for empower-ment (Dunn, 1989). In addition to the recognition of power, ESOP partners mustshare a unified vision. The ESOP is merely a mechanism for aligning the interestsof a single stakeholder constituency. In the absence of goal congruence with theemployee community, the ESOP is as subject to ownership diffusion as the cor-poration. A third condition for power to be substantive is closely related to thispoint: the ESOP must have organized leadership. The most direct exercise of con-trol available to ESOP participants occurs through the vehicle of voting. Corporategovernance structures can be turned to the advantage of employees through exerciseof voting privilege.

It must be acknowledged that even if such conditions are met, the ESOP maywell be impotent. Although the ESOP avails itself of legitimate ownership rights,develops a consensual agenda, and advances vital leadership, other stakeholdersmight possess equal or greater power with respect to the organization. Consider,for example, the conflict between the interest(s) of managers and owners whicharises during a hostile takover bid. Corporate management plays a central role inthe outcome of takeover attempts. Well aware that over half of a target firm'sexecutives will no longer be with the acquiring firm three years after a merger oracquisition (Kenser & Dalton, 1985), self-interest dictates that managers becometerritorial, resisting efforts aimed at eroding their control of the organization.

Ironically enough, ESOP formation repeatedly functions as the most effectivemeans of entrenching the interest(s) of a firm's managers. As a company perk, insome instances ESOPs fall under the direct purview of management. More often,ESOP shares are held in trust for employees until programmed dispersal dates —with trustees frequently appointed by management. Even when banks fulfill thetrusteeship function, corporate executives may hold the real power, for banks aredependent on management in all aspects of such plans (Dye, 1985). Whatever theformal structure, with management in power takeover advances are likely to besuccessfully spurned at the expense of the value of the firm: During the two-dayperiods following announcement of a hostile bidder's plan to abandon its takeoverattempt, the stock price of the target firm can be expected to drop close to 10%(Dann & DeAngelo, 1988). To the extent that managers are able to control the

Fusion of Privilege and Power 67

C The 'Agency Problem' J C Managerial Self-interest

Conflict Between Interests ofManagers and Owners J

C Efforts atManagerial Entrenchment

C Hostile Takeover Attempt

L

J

J

Formation ofManagerial-Controlled

Employee Stock Ownership Plans

C (Unintended) Conferal ofEmployee Ownership Rights J [ Managerial Empowerment J

Fig. 2. ESOP formation in practice.

voting disposition of ESOP shares, the agency problem is aggravated rather thanrelieved (see Fig. 2).

In spite of this grim depiction, one positive (albeit unintended) effect ofmanagerial self-interest has been the coalescing of workplace and ownership rightsin the hands of corporate employees. While it has been demonstrated that rightsdo not necessarily beget active power, they do imbue their bearer with latent power.If the previously outlined conditions are met, latent power gives way to activepower. Once a coalition of employees gain an ownership position in the firm theyare much more likely to participate in corporate governance, for the rights ofemployees as owners are significantly greater than the rights of employees as workers(Fromson, 1990; Graves, 1990). Rights, therefore, play the most fundamental ofroles in employee empowerment —and are therefore appropriately the subject ofour most thoroughgoing examination.

RIGHTS-WORKPLACE, OWNERSHIP, AND CORPORATE

One of the foundational tenets of any free-market economy is the right toprivate ownership of the means of production. Rights, as defined by Gewirth (in

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Beauchamp & Bowie, 1988, p. 46), "are [morally] justified claims that individualsand groups can make upon others or upon society." Given the centrality of propertyrights to the operation of capitalist economies, it is not surprising that, in cases ofconflict among a variety of rights, resolution has often favored the holder of proper-ty rights. What is startling, however, is that the primacy afforded property rightshas often occurred to the exclusion of constitutionally guaranteed rights ofemployees as persons. Before a closer inspection of property rights is undertaken,an examination of the moral basis for workplace rights is in order.

Workplace Rights

It has been argued elsewhere that various and several rights are due workersby virtue of their employment status (Werhane, 1985, p. 27). These rights mightinclude, but are not limited to, the right to due process, to freedom, to privacy, tosafe working conditions, to participation, and to a "meaningful" job. Such workplaceentitlements have their grounding in a more fundamental set of rights common toall persons (e.g., the right to safe working conditions is derived from the right tolife). These more basic moral rights are available to all persons, and are thereforejustifiably applied to those working within the business enterprise, whatever itsownership form.

At the very heart of workplace rights stands the right to ownership of one'sown work, or labor. Absent reference to individual(s) who perform work, the con-cept of labor would be devoid of meaning. The right to one's work is thereforeinalienable from an understanding of who one is as a person. By extension — andcontrary to the view that all capital is stored labor —the corporation might be saidto "own" labor only if it were capable of owning the person(s) to whom said workis inextricably linked. Given this formulation, it becomes apparent that the right toone's work is of a decidedly different complexion than property rights, for propertycan appropriately be conceived of without any allusion to personhood. While anartificial entity, such as the corporation, is capable of owning property, it cannotin the same sense be said to "own" its own labor—for it has none to offer. Onemight counter that the corporation purchases the labor of the workers it hires injust the same way that it procures its other factors of production. The economist'sdepiction of land, labor, and capital as the inputs to the production process, how-ever, is not meant to suggest that these commodities are of the same essential char-acter, rather, the lesser claim being advanced is that equivalent corporate end(s)can be achieved through a variety of combinations of these three inputs.

The inescapable conclusion to be derived from the previously noted line ofreasoning is that employer-employee relationships are not merely economic in na-ture. Were the corporation able to acquire labor without involving persons, as inthe theoretical case of a fully automated factory, the theme of the moral obliga-tion (s) of the corporation to its employees might well be moot. As this is not theusual case, however, the discussion of corporate duties to employees is of immensepractical significance. Human interaction in general is governed by moral as wellas economic laws; corporate employment practices do not prove an exception to

Fusion of Privilege and Power ^ '

this general principle. This platform suggests that corporate employee responsibilityextends well beyond simply providing "fair" financial compensation to workers forthe labor that they have performed.

This is nowhere more evident than in the case of implied contracts in employ-ment (Werhane, 1985, pp. 144-152). Reciprocal expectations very naturally emergewithin the employer-employee relationship as employees are retained and/or ad-vanced within the corporation. Accountability becomes evident as the companycomes to anticipate continued improvement in the employee's performance whilethe employee comes to expect extended employment with the firm. Over time suchwarranted expectations take the form of an implied moral contract: in considerationfor their continued loyalty and productivity, employees secure a moral (albeit notlegal) entitlement to respect and job security.

Ownership Rights

Ownership rights —unlike workplace rights —have their basis \n property theory."According to [the ideology of John Locke], the rights of the individual aresafeguarded through property rights, which extend both to body and estate" (Lodge,1986, p. 64). "Property" implies the joint requirements of nominal ownership aswell as power (Berle & Means, 1932). Among the variety of stakeholder groups itis only the firm's shareholders who hold a property ownership interest in the firm.Such a property ownership interest grants the shareholders the exclusive right tothe use and enjoyment of such property, so long as said use does not infringe uponthe rights of others (i.e., other ^/a/ceholders). This formulation requires that in casesof conflict among rights the property owner surrenders his/her claim of benefit ex-clusivity. Within the current context, application of this principle would disallowshareholders (or their agents) from employing corporate assets in a manner servingto violate the rights of workers.

In spite of this limitation, the interests of property owners have routinely beenafforded primacy in cases of rights conflict. The rationale for such partiality is foundin the assumptions underlying free-market capitalism. Naive readers of Adam Smithhave concluded that it is as individual persons pursue economic self-interest thatthe good of the community is maximized. This rather elegant formulation beliescenturies of debate concerning the conflict between private gain versus public good.Were one to grant that this first premise of capitalism holds, individuals wouldnever need engage in moral reflection: it could safely be assumed that through thesingle-minded pursuit of self-interest one would spontaneously create the best pos-sible society. Consider, however, the words of Smith himself:

. . .man . . .ought to regard himself, not as something separated and detached, but as acitizen of the world, a member of the vast commonwealth of nature . . . to the interest ofthis great community, he ought at all times to be willing that his own little interest should besacrificed, [emphasis added] (as cited in Sen, 1987, p. 22-23)

What economists have been able to demonstrate is that pursuit of individual wealthwithin a free-market system, if not creating a good society, produces a wealthy one.It is only as wealth is equated with "goodness" —as in the tradition of John

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Calvin-that one might reasonably conclude the best possible state of affairs toresult from giving self-interest its fullest expression. Just such an equation hasresulted in the interests of shareholders scoring "trump" within the corporate con-text. Within this formulation, to give due consideration to any stakeholder inter-est(s) would amount to nothing less than stripping the firm's owners of theirrights-in this limited formulation the only rights that "count." Ultimately, allcountervailing interests — including, most notably, those of employees — are naturallysubordinated to the claims of property owners owing to the conviction that suchan ordering results in "the greatest good for the greatest number."

One must be left more than a trifle uncomfortable with the above situationin light of the general principle that rights entail responsibilities. It has already beennoted that fixed to property rights is the strong condition that the exercise of suchprivilege does not infringe upon the rights of others. While it may not be entirelyclear how resolution is to be attained within any specific case of conflict amongrights, what is known is that the privilege of property owners does not hold uncon-ditional sway. Rights are seldom, if ever, absolute. One might fairly conclude thatas moral agents the firm's owners bear an ethical obligation to evaluate whetheror not the operation of their corporate enterprise — profitable or not —encroachesupon the rights of the full spectrum of stakeholder interests. Under conditions ofdiffuse stock ownership, however, shareholders seldom ponder the duties attachedto ownership; rather, stock holdings are often viewed strictly as impersonal invest-ments. As agents for the firm's owners, managers often find themselves in the un-enviable position of arbitrating rights disputes —while commensurately possessingboth rights and power of their own.

In spite of such practical reservations surrounding the soundness of the free-market premise, it is important to note the dominant standing afforded propertyrights within Western society. In the absence of such an understanding, one wouldbe hard pressed to account for the discord that periodically arises betweenshareholders, employees, and managers. Conflicts of privilege are not limited tointeractions among these three interest groups, however; numerous writers havesuggested that the corporation itself is the bearer of certain rights. A critical ex-amination of this most interesting of rights claimants follows.

Corporate Rights

In the notable words of Chief Justice Marshall penned in 1819 with referenceto the case of Dartmouth College vs. Woodward, the corporation is in the uniqueposition of being "an artificial being, invisible, intangible, existing only in contempla-tion of law. Being the mere creature of law, it possesses only those properties whichthe charter of creation confers upon it, either expressly, or as incidental to its veryexistence." Contemporary judicial rulings have increasingly granted corporations thelegal status of personhood. Such standing has guaranteed the corporation certainrights at law, including the right to autonomy, to economic freedom, and even tofreedom of speech. Progressive corporate officers have intensified their claim that

Fusion of Privilege and Power 71

the business enterprises that they manage are the appropriate beneficiaries of sucha specific set of rights.

Werhane (1985, p. 60), however, has argued that "the rights of organizationssuch as corporations are derived from, dependent upon, and secondary to, in-dividual rights . . . [tjherefore corporate rights claims entail obligations to respectthe equal rights of other individuals." In order for corporate legal claims to bejustified they must have a moral basis (Werhane, 1985, pp. 3, 7-8). While legalentitlements do not necessarily engender reciprocal duties, moral privilege doesimply complementary ethical responsibility—as was evident in the discussion of bothownership and employee rights. If, therefore, it is asserted that corporations areappropriately the beneficiaries of certain moral rights, as the argument from legalclaims seems to suggest, such corporations are subject to reciprocal obligations.Such duties include a charge to respect the equal rights of both other individualsas well as discrete corporations.

The situation regarding corporate rights is much more complex than the aboveformulation would suggest, however. While the corporation may be granted per-sonhood status at law, from an ethical perspective it is not at all clear that thecorporation may justifiably be held morally culpable for its actions (for a dissentingopinion, see Goodpastor & Matthews, 1990). It is a gross oversimplification to as-sume that corporations must be morally responsible based upon the observationthat law finds its justification in morality, for moral accountability necessarily entailsthe capacity for volitional action. Corporations are not able to act absent the actionsof those who "cause" them to perform; in this regard the business enterprise is nomore than an instrument in the hands of corporate decision makers.

This characterization might well put one in mind of a common theme voicedby such groups as the National Rifle Association: "Guns don't kill people, criminalsdo." Suppose the possession of any and all firearms became a criminal offense, andthe statute used for enforcement had the strongest of groundings in moral theory(e.g., a utilitarian argument that the greatest good for the greatest number wouldbe promoted through such an ordinance). Would all guns thereby become "im-moral" as well as illegal? Certainly not, for guns are not capable of volitional action.This is not to say that the possession of fully automatic machine guns ought to belegal; rather, what is being suggested is that the reasons given for outlawing certainclasses of firearms must turn on considerations other than the inherent immoralityof the instruments themselves (such as the claim that said weapons are useful onlyfor purposes of human destruction, which itself constitutes a morally reprehensibleact).

The corporation per se would seem to bear neither moral rights nor moralresponsibility —a perspective starkly contrastive to the legal view outlined pre-viously—were the above metaphor applied to the business realm. Neither the viewthat corporations are devoid of moral responsibility, nor the view that suchenterprises are afforded the status of persons and therefore bear full moral cul-pability, seems to offer an adequate elucidation of corporate accountability. Thank-fully, there exists a third option serving to reconcile these two disparate images.Corporations might be seen as the beneficiaries of collective rights. On this view,corporations are the possessors of secondary rights derived from individual moral

Dunn and Daily

rights. Simply by virtue of being rational moral agents, individuals possess a set ofprimary rights-a subset of which has been discussed with respect to workplacerights. Consistent with the view that corporations are not strictly moral agents, suchrights do not directly apply to the corporation. However, even though corporationsare not capable of primary, or volitional, action, they nonetheless engage in secon-dary "actions" as they are moved to perform such deeds by corporate decision-makers. Corporate rights and duties are thereby logically derived from thecorporation's capacity to perform such secondary actions—explaining in part thelegal accountability of the corporate enterprise.

One of the fundamental characteristics of secondary rights is that, beingderived from personal moral rights, such derivative rights may not take precedenceover individual rights (Werhane, 1985, p. 62). This argument demands that the cor-poration respect the equal rights of other corporations as well as the primary rightsof affected individuals. In cases of rights conflicts between the bearers of corporaterights and those of individual rights the interest of the individual necessarily takesprecedence, for primary rights are stronger claims of privilege than are secondaryrights.

CONCLUSION: THE STAKEHOLDER PERSPECTIVE

The above discussion has served to illuminate the variety of rights conflictswhich might exist within the organizational context. Freeman and Gilbert suggestthat

. . . the best possible conception of corporate strategy is one that is based on the rightsof individuals . . . Corporations are, in our view, to be seen as mere means toward theaccomplishment of human goals. This contrasts sharply with the common view that cor-porations are ends in themselves, and that individual goals, wants, desires, values and per-sonal projects must be subordinated to those of the corporation (1988, p. 8)

The primary rights of individuals are therefore appropriately afforded special statuswhen they conflict with the secondary rights of the corporation. Conflict of a morepragmatic sort has also been examined: the clash of self-interest betweenshareholders and managers which is hypothesized to occur when corporate owner-ship is diffuse. Given the prior discussion of rights, this particular conflict can nowbe recast from the perspective of moral theory. Shareholders are the bearers of aspecific set of property rights, entailing both rights and responsibilities. Managersare commissioned to represent such interests as they conduct the day-to-day busi-ness of operating the corporate enterprise, with the following stipulation: the ex-ercise of shareholder privilege shall not encroach upon the legitimate claim(s) ofother stakeholders. This charge requires that managers reflect upon the consequen-ces of organizational activity for a variety of constituencies, including a corporation'semployees. Ideally, corporate leadership will seek to construct win-win outcomesfavoring the full range of relevant stakeholders.

This view of moral responsibility often fails, however, owing to the agencyproblem. Resolution of the agency problem might well be found with ESOP origina-tion, for ESOPs represent a practical mechanism for uniting the interests of

Fusion of Privilege and Power 73

managers with those of both shareholders and employees. More specifically, ESOPsprovide employees with both workplace and ownership rights—thereby eliminatingthe potential for conflict between these two sets of rights. In practice, however, theagency problem does not arise strictly as a consequence of rights conflicts. It hasbeen demonstrated that a further necessary condition for the occurrence of suchbreaches of managerial fiduciary responsibility is diffuse stock ownership, for dif-fusion of ownership implies a lessening of shareholder power. Once again, the in-itiation of an ESOP serves to resolve this problem, for in addition to unitingworkplace and ownership rights in the hands of employees ESOPs represent col-lective, or nondiffused, ownership —and thereby at least the potential for defeatingmanagerial opportunism. Unfortunately, breach of trust lies at the heart of the agen-cy problem —and systemic solutions can hardly be expected to reverse the effectsof personal moral failure.

ACKNOWLEDGMENT

The authors wish to acknowledge their indebtedness to The Poynter Centerfor the Study of Ethics and American Institutions (Indiana University) for itsgenerous funding and intellectual support of this research project.

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