A Social Contract Account for CSR as Extended Model of Corporate Governance (Part Ii): Compliance, Reputation and Reciprocity

Abstract

This paper is the second of a two parts essay aimed at giving a contractarian foundation to the concept of Corporate Social Responsibility (CSR), meant as an extended model of corporate governance of the firm. The first part has been focused on rational bargaining and justification. Here, on the contrary, I am focused over the implementation and compliance domain. First this domain is defined in terms of the relevant game theoretical model, which is required to represent ex post implementation of an ex ante agreed contract and must be able to account for the self-enforceability of institutions resulting from the social contract. The model of reputation games, with reference to the basic game of trust, is introduced in order to make sense of self-regulation as a way to implement the social contract over the multi-fiduciary model of corporate governance. This allows understanding why self-regulation, meant as the mere resort to a long-run strategy in a repeated game of trust, fails in making sure the reputation of the firm when the game is surrounded by incomplete contracts and unforeseen contingencies. Hence, two basic problems for the functioning of the reputation mechanism are faced: the cognitive fragility problem, and the motivational problem in turn. As far as cognitive fragilities of reputation (resulting from impact of unforeseen contingencies and bounded rationality) are concerned, the paper elaborates upon the idea of proper self-regulation, based on explicit norms, and develops the logic and the structure that these self-regulatory norms must satisfy if they have to serve as a gap-filling tool for the remedy of cognitive limitations in the reputation mechanism. This coincides with an ethical decision procedure employing fuzzy logic and default reasoning. Then, a motivation problem emerges from the possibility of sophisticated abuse on the part of the firm, employing equilibrium mixed strategies in the repeated trust game. Here an entirely new application of the theory of conformist preferences is developed as an approach to the problem of the motivational role played by business ethics norms. This section answers the "real life" question raised about stakeholder' activism and why they do not acquiesce to sophisticated abuse by the firm. The result derives from straightforward calculation of stakeholders' overall utilities and equilibrium strategies under the hypotheses of conformism-and-reciprocity-based preferences and overall utility functions.

Keywords: Self-regulation, Ethical norms, Management Standards, Reputation games, Unforeseen contingencies, Fuzzy logic and Default reasoning, Reciprocity, Conformist preferences

JEL Classification: M14, L14, C72, D23, D64