Ties that Unwind: Dynamism

in Integrative Social Contracts

Theory1Robert A. Phillips

Michael E. Johnson-Cramer

ABSTRACT. Social contract theory offers a powerful

method and metaphor for the study of organizational

ethics. This paper considers the variant of the social

contract that has arguably gained the most attention

among business ethicists: integrative social contracts the-

ory or ISCT [Donaldson and Dunfee: 1999, Ties That

Bind (Harvard Business School Press, Boston)]. A core

precept of ISCT – that consent to membership in an

organization entails obligations to follow the norms of

that organization, subject to the moral minimums of basic

human rights – is a reasonable and appealing notion. One

potential challenge for those attempting to apply this idea,

however, lies in the dynamic nature of social norms.

Organizational norms evolve, often through the con-

scious efforts of community members and leaders. As

currently formulated, ISCT offers a framework that un-

der-appreciates the evolving nature of moral norms. In

this paper, we extend ISCT by considering the circum-

stances under which the terms of and parties to social

contracts change. We also consider a number of principles

that should be considered as the terms and parties to

organizational social contracts change.

KEY WORDS: social contract, ISCT, ethics, dynamism,

stakeholder, organizational change

Donaldson and Dunfee’s (1999) integrative social

contracts theory (ISCT), for all of its conceptual

sophistication, also provides the reader with a prac-

tical and useful set of guidelines for moral decision-

making. Let us imagine a manager, guided by ISCT,

evaluating the morality of a potential action. This

manager needs only to answer a brief series of

questions: To what community do I belong? Is this

course of action sanctioned by the norms of this

community? Have those norms been properly

authenticated by my community? (In other words,

does a majority of my community freely subscribe,

in word and deed, to this norm?) Is this norm

legitimate when compared with the minimal stan-

dards, or hypernorms, that govern human society as

a whole? Answering these questions, our imaginary

manager evaluates the fit between the proposed

course of action and two relevant social contracts:

one a microsocial contract evidenced by the com-

munity’s norms, the other a hypothetical macroso-

cial contract that all rational people would likely (or

already do) accept. These contracts serve as moral

longitude and latitude; with them, our contractarian

charts a course through the moral free space that is

both an empirical fact of life and a hypothetical

product of the macrosocial contracting process.

Despite the apparent simplicity of this exercise,

applications of ISCT are scarce. One possible

explanation is that applying ISCT is not nearly as

straightforward as we imagine. Indeed, where this

exercise breaks down most readily is the assumption

that social contracts afford a consistent and stable

basis for decision-making. Our manager must act as

if longitude and latitude are fixed, but in reality,

managers must somehow cope with a normative

landscape that is both changing and changeable. The

conceptual apparatus offered by ISCT, as currently

formulated, provides inadequate guidance for such

managers as they navigate a dynamic rather than a

static reality. Not even the most committed con-

tractarian can answer any of the questions posed

above without further assistance on several fronts. As

such, additional elaboration of the ISCT conceptual

apparatus must accompany its application, by

scholars or managers, to business situations. None-

theless, we contend that ISCT is an important

contribution to the study of organizational ethics and

a powerful method for ethical decision-making. In

Journal of Business Ethics (2006) 68:283–302 � Springer 2006DOI 10.1007/s10551-006-9015-7

this paper, we undertake an interstitial elaboration of

ISCT, filling gaps relating to the dynamic nature of

social norms. Through this immanent critique we

hope to strengthen ISCT rather than disparage it.

In what follows we begin by describing a number

of challenges the prospect of change presents for

ISCT including ambiguities in the definition of

community and the process of norm evolution and

intentional alteration. After discussing these chal-

lenges and ISCT’s current means of addressing them,

we go on to propose candidate principles that may

better equip ISCT for the dynamic world it is in-

tended to represent.

ISCT and the challenges of change

To attribute an entirely static view of reality to ISCT

is to misread Donaldson and Dunfee’s work. The

normative landscape featured in Ties That Bind is,

without question, a turbulent one. Donaldson and

Dunfee talk at length in the first chapter about change

as the impetus for social contracts (1999, p. 7ff). Firms

today often find themselves ensnared in evolving

microsocial contracts that change the rules of

engagement in the global economy. Such changes in

stakeholder expectations concerning business

behavior can have important social and economic

consequences. As observers of this business reality,

Donaldson and Dunfee find their eyes naturally

drawn to the shifting normative patterns that

characterize a dynamic business environment. To

begin, therefore, we should look to the ways in

which Donaldson and Dunfee address dynamism and

stasis.

The mainsprings of change in ISCT are voice and

exit. Changes to the terms of the social contract arise

first from the efforts of community members to

change the microsocial contract through the exercise

of voice. Donaldson and Dunfee, relying on Hir-

schman’s (1970) categories, suggest that the exercise

of voice plays a key role not only in authenticating

norms but also the change process by which illegit-

imate norms are replaced by legitimate ones. They

write:

What, then, are the options available to the dissent-

ing employee? The first is to exercise ‘‘voice’’ to try

to bring about a change in the authentic norm with-

in the community. The term ‘‘voice’’ is broadly de-

fined to include any means of communication that

may influence the attitude and behaviors of other

community members. Some actions have the effect

of influencing changes in extant norms; others de-

fend the status quo. Voice plays a critical role in the

emergence and evolution of authentic norms. Voice

helps to clarify understandings concerning the specif-

ics of authentic norms. (1990, p. 163)

However, the effects and effectiveness of voice may

also be limited by second dynamic, a social selection

mechanism that eliminates non-conformity in mi-

crosocial communities. Drawing again on Hirsch-

man, Donaldson and Dunfee focus on exit as the

most likely, perhaps morally preferred, option for

those resistant to norms that are otherwise widely

accepted (authentic) within the community and

consistent with macrosocial (legitimate) hypernorms.

Donaldson and Dunfee point to occasions in which

exit may not be the most appropriate response to

egregious violations of hypernorms. They suggest,

too, that failure to exit cannot always be taken as a

sign of acquiescence, due to constraints on exit. But,

they contend:

... if the only factor constraining exit is financial and

personal to the community member, then it should

not be considered sufficient to affect the obligation

to comply with legitimate norms. The fact that an

employee would have to take a pay cut to escape the

authentic norm supporting donations to Planned

Parenthood [an example from the prior page] does

not represent a restriction on exit sufficient to undo

the community’s capacity for generating obligatory

authentic norms. (1999, p. 165)

A community that enforces its norms and allows

those who disagree with them to exit is likely to

experience conformity to existing norms more so

than dynamism. Those who refuse to behave con-

sistently with strong norms are more likely to leave

the organization, thereby increasing the relative level

of conformity among those who remain.

The mechanisms of voice and exit represent the

primary sources of dynamism for ISCT. However,

these separate processes – vocal minorities pressing

for change and social selection pressing for confor-

mity – prompt more rather than fewer questions for

our imaginary contractarian manager. These ques-

tions cluster around three issues:

284 R.A. Phillips and M.E. Johnson-Cramer

1. The definition of community – Given that the

obligation to act consistently with the norms

of the community is central to ISCT, then

community membership becomes the first

and, perhaps, most pressing concern in ensur-

ing ethical and consistent economic behavior.

The load borne by community definition in

ISCT magnifies this challenge considerably.

Of which communities am I a member and

therefore subject to their norms? How much

consistency and conflict exist among the

communities to which I belong? Who else is

a member of this community?

2. The evolution of norms – It is tempting to see

in ISCT a general trend of improvement in

the legitimacy of local social norms. As per-

haps authentic, but illegitimate norms are

weeded out, the evolution of microsocial

contracts may be seen as involving the

replacement of illegitimate norms with legit-

imate ones. Contrary to this assumption,

however, the most common evolution of

microsocial norms, in light of extensive

moral free space, may be the evolution from

legitimate to legitimate. This evolutionary

pattern not only leaves our manager facing

the choice ‘‘between right and right’’ (Ba-

daracco, 1997) but also prompts new think-

ing about how to deal with those still

subscribing to the former norm. What hap-

pens to community members who subscribe

to legitimate but no longer authentic norms?

What happens to the old contract (its terms

and parties) when the new one comes into

force?

3. Mechanisms for revising contracts – At any deci-

sion point, our manager confronts the choice

of whether to press for the community to re-

vise the existing norms. If this manager elects

to press for change, when is it permissible to

engage in behavior consistent with the as-

pired-to but as yet inauthentic norms? How

far is one obliged to act inconsistently with

her own beliefs due to an extant authentic

norm? When may others, whom the manager

has influenced, make the shift from agreeing

in thought to enacting the new norm? What

obligations does the community have not

only to allow this manager to voice concerns

but also to engage actively in hearing them

and responding?

In the next section, we elaborate each of these issues

in detail. Before proceeding, however, it is impor-

tant to consider the methodological basis for our

critique of ISCT as inadequately appreciative of

social and organizational change. How do we begin

to address these questions so as to allow our con-

tractarian manager to proceed? Advocating one or

another micro-norm in a particular setting is not our

task in this paper. Instead, we address those issues to

which the only reasonable response is an alteration –

a ‘friendly amendment’ – to the social contract logic

envisioned in Ties that Bind. As the argument

develops, we rely on two distinct but compatible

methodological strategies. First, much of our cri-

tique rests on matters analytic to the concept of

contract. We suggest that some gaps in ISCT’s

handling of a dynamic reality originate from an

incomplete treatment of the nature of contracts

themselves. Van Oosterhout et al. (forthcoming) use

a similar strategy in elaborating on ‘‘The internal

morality of contracting’’ in ISCT and contractual

business ethics more generally.2 Actual contracts are

designed to deal with change and allow for asyn-

chronous exchange. Relieving our manager’s con-

fusion requires that we reconcile the existing notion

of social contracts with that of the more familiar

conception of contracts on which ISCT relies for its

power.

Secondly, we revisit the broadly Rawls (1971)

macrosocial contract employed by Donaldson and

Dunfee. We contend that reasonable and rational

macrocontractors would attempt to preempt con-

cerns arising from the acknowledgement of the

dynamics of contracting. These contractors would

recognize ‘‘social contracts’’ as more alterable than

paper contracts, but would not want them to be

infinitely flexible. We argue for supplementary

principles that would arise from the original mac-

rosocial contract deliberations as these contractors

considered the implications of change.

Community definition and freedom of exit

The question of community membership determines

what micro-norms apply to our contractarian man-

Dynamism in Integrative Social Contracts Theory 285

ager. As such, it is a pressing issue but not necessarily

a simple one. Recognizing the importance and

complexity of community membership, Donaldson

and Dunfee offer a necessarily broad definition of the

term:

A community is a self-defined, self-circumscribed

group of people who interact in the context of

shared tasks, values, or goals and who are capable of

establishing norms of ethical behavior for themselves.

(p. 39)

Membership in a community can derive from an

express contractual commitment, as in the case of

entering into an employment contract with a term of

years, or it may just involve participating in a group

and being acknowledged by others as a member.

(p. 41)

In this section, we consider three ways that com-

munity definition can change and the moral con-

siderations these may evoke for communities and

individuals as contracting agents. Changes in the

criteria of membership, the fact of multiple com-

munity affiliations with disparate moral demands and

both voluntary and imposed exit from a community

all present challenges arising from dynamism in social

contracts. We turn now to a discussion of these

challenges.

Changing membership criteria

It seems reasonable to hinge the privileges and

expectations of community membership on whether

an individual satisfies a set of relevant criteria.

Medieval guilds defined their trades by determining

who would and would not be considered guild

members; they required certain apprenticeships,

skills, and even ethical conduct – standards of fair

trade and of quality craftsmanship. Today, economic

communities still have membership criteria – some

restrictive, some merely commonsensical – that help

to distinguish members from non-members.3

Members of the automobile industry are companies

that manufacture automobiles. Employees at

Microsoft are those people who work at Microsoft;

this status is usually signaled by name badges,

employment contracts, etc. All contracts levy some

expectation of performance on contractors (Corbin,

1952), and it is by this standard that we can distin-

guish community members from non-members.

That these criteria exist and have real conse-

quences for both privileges and responsibilities of

community members becomes obvious when it

comes to light that a recognized community mem-

ber does not, in fact, satisfy the membership criteria.

A guild member who was found to have lied about

fulfilling his apprenticeship duties might reasonably

be excluded from the guild. Similar consequences

result when membership criteria themselves change.

In the language of contracts, we might say that the

evolution of membership criteria amounts to

changing, in mid-stream, who is or is not considered

a party to the contract. The history of social con-

tracts is replete with examples of this – from Kings to

Congress, from church to state, from state to

shareholders, from shareholders to stakeholders, etc.

John Locke’s (1690) Second Treatise of Government, a

classic of social contract thought, was an extended

call for significantly altering the terms of the existing

contract with the monarch. The American Revo-

lution was a new social contract that excluded

George III – to his manifest dissatisfaction. Examples

of evolving membership criteria frequently arise in

the economic sphere as well, with both inclusive and

exclusive effects. Hoffman’s (1997) account of

institutional change in the U.S. chemical industry

recounts the story of environmental groups

becoming recognized partners in the efforts to solve

the environmental problems confronting the indus-

try.

As mentioned, these shifts in community mem-

bership criteria can be either inclusive or exclusive.

Each, however, raises difficult problems. The inclu-

sion of those who had not been members raises

questions about possible co-optation (Selznick,

1949). Without some form of informed consent,

groups may find themselves defined into economic

communities, which then require obedience to

community norms. Thus, for example, while the

inclusion of environmental groups by chemical

industry companies brought new privileges – most

notably a voice in discussions – it also imposed new

normative expectations. It was no longer considered

fair play to attack ‘‘partner’’ companies without limits.

Another version of inclusive criteria may be that

class of stakeholders who are community members

due to coercion. Some of these cases are more

286 R.A. Phillips and M.E. Johnson-Cramer

dramatic versions of the sort of situation that Don-

aldson and Dunfee addressed in the earlier cited

passage. A mere pay cut may not be coercive, but

when a person takes a job because it is the only one in

an entire region of a developing country, the alter-

native is literal starvation, and the case for consent is

trickier.

More problematic still (if only due to its relative

frequency) are those situations when a majority

of community members – or perhaps simply its leaders

– determine that a certain class of community members

no longer meets the criteria for membership or merits

the privileges of the membership. Such exclusionary

changes amount to a form of involuntary exit and

deserve special consideration if ISCT is to successfully

address the dynamic reality of economic life. We can

trace this problem directly to Donaldson and Dunfee’s

own broad approach to community definition, in

which community membership criteria merely reflect

the authentic microsocial norms of the community.

However, insofar as the authenticity of these norms

depends on who is considered a member of the

community, decision makers lack an independent

reference by which to evaluate changes in mem-

bership criteria (Rowan, 2001). Ultimately, com-

munity membership criteria are flexible, and because

they are also highly consequential for our manager

and the people affected by that manager’s decisions,

we conclude that ISCT must offer more guidance in

determining who is, or should be, a party to these

contracts.

Community selection

If the question of membership criteria involves the

standards by which communities count individuals

as members, the corresponding issue for individuals

is community selection. The second fact of com-

munity membership is that the individual recognizes

his or her membership in the community, and in

practice, this recognition is manifest in whether he

or she identifies the community as a relevant source

of norms governing decisions. As Donaldson and

Dunfee acknowledge, selection is complicated by

the overlapping communities to which individuals

frequently belong (1999, p.101), yet from their

perspective, this complexity need not overly burden

the decision-maker. They write:

... [J]udgment needs to be exercised in the selection

of communities. It is neither helpful nor necessary to

identify every possible combination of communities

that might conceivably have a norm... (1999, p.

200).

The essential issue here is with which community

our contractarian manager chooses to identify in

order to make a given moral decision. From this

perspective, the familiar model of the firm as a nexus

of multiple contracts among stakeholders (Jensen and

Meckling, 1976; Jones, 1995) extends to all eco-

nomic actors. Our manager stands at such a nexus,

having become a contracting party to multiple

contracts, some of which make conflicting demands.

Not all overlapping community demands on an

individual will contradict each other. However, as

with rights, duties and obligations of all sorts, there is

only limited guidance as to which contracts (and

obligations) should take precedence.

The dynamic aspect of community selection

emerges when individuals change the priorities that

they assign to communities. And, perhaps more

easily than firms, individuals can change their pri-

orities from decision to decision, shifting the norms

to which they must adhere and their relative

importance. Further, the dynamic nature of com-

munity selection is enhanced by the relative ease

with which it occurs. Where exit from a community

(discussed below) often entails considerable costs,

selecting a different community’s norms to guide a

given decision is relatively costless. Unfortunately,

where changes in community selection might be less

costly to the individual, they are no less conse-

quential for the communities involved.

Donaldson and Dunfee offer a set of priority rules

for guiding this selection process. However, these

rules paper over fundamental difficulties for con-

tractarian thinking. First, community selection pre-

sumes that individuals can and should choose which

norms govern their decisions, despite the fact that, as

members in each of these communities, they have

accepted privileges that hinge on their acceptance of

the normative burdens of each. Here, ISCT allows

the seemingly intractable situation to arise in which

parties subscribe to multiple, mutually exclusive

contracts. If this were not problematic enough, in its

fundamental conception of what a contract is, the

dynamics of community selection generate a second

Dynamism in Integrative Social Contracts Theory 287

problem: the degree to which individuals are al-

lowed by ISCT to play their community member-

ships off against one another. Specifically, in those

instances when individuals face conflicting norms,

ISCT offers little resistance to our manager if she

chooses always those norms that exact the lightest

moral burden (call it ‘‘community-shopping’’ – an

analogy to the legal slang ‘‘jurisdiction shopping’’

whereby attorneys seek to bring suit in the court

with the friendliest laws). This seems an unlikely, not

to mention undesirable, result of the hypothetical

macrosocial contracting process. These problems are,

we argue, intensified by the emphasis on prioritiza-

tion itself. We later discuss the prospects for deem-

phasizing prioritization in deference to the search for

a mutually agreeable, but as yet non-existing, gov-

erning norm.

Exit

The third fact of community membership is that, at

the time of the decision, the individual has not

chosen to exit the community. It may seem odd to

imagine a community as those people who have not

yet chosen to leave; however, this fact merits

attention because of its centrality in contractarian

thinking. The availability of exit, especially as a

possible response to undesirable or unjust commu-

nity norms, is distinctive to organizational partici-

pants as social contractors. Phillips and Margolis

(1999) argue that among the challenges of using

Rawls’s (1971, 1993) social contract methodology at

the level of the organization is that a certain freedom

to alter affiliations with organizations (i.e., emigra-

tion and immigration) exists for members of orga-

nizations that is methodologically precluded in

considering societal-level norms. It is problematic at

the societal level of analysis (e.g., Rawls’s justice as

fairness) to argue for norms that permit a ‘‘love it or

leave it’’ clause. However, for ISCT, recourse to exit

is not merely permissible; together with voice and

compliance, exit constitutes standard recourse. Thus,

the very parties to the contract themselves are sub-

ject to (often unilateral) revision. Any consideration

of dynamism in social contracts must take account

not only of changes to the terms of the social

contract (i.e., norms) but also of changes in the

parties to the contract.

Of course, a social contract theory that relies

centrally upon exit as viable or preferable reaction

to disagreement flies in the face of the standard

notion of a contract. Put simply, the very purpose

of a contract is the self-imposed restriction of one’s

freedom. Contracts exist in large part to restrict

future liberty of one or several parties to the con-

tract (Corbin, 1952). If immediate reciprocity were

possible, there would be no need for contracts. If

one is able to simply opt out (or push another out)

of a contract at any time, irrespective of compen-

sation, it is a far less useful device. Clearly social

contracts must have a higher degree of flexibility

than actual legal contracts. But what are the bounds

on this flexibility? By what process and under what

constraints can the very parties to social contracts

be altered? What, if any, tension exists between

freedom of exit and the power of the social con-

tract?

Moreover, by treating exit as a dynamic feature of

an individual’s possible action set, we find that all

forms of exit are not created equal. Returning to our

contractarian, we find her contemplating exit as a

possible response to a moral quandary. On the one

hand, exit may be a response to unjust, or illegiti-

mate, community norms, which the manager does

not wish to affirm. This form of exit is the one most

commonly cited, with approbation, in Ties that Bind.

If we assume that all exit occurs for this noble reason,

some might think it reasonable that such exit impose

no further obligations on community members.

However, the idea of costless exit is more obviously

problematic in those instances where exit is imposed

on one party by another (e.g., layoffs, plant reloca-

tions, etc.). In each of these instances exit with no

further obligations seems unreasonable. Indeed, our

macrosocial contractors would surely consider the

relaxing of all obligations unreasonable even in the

abstract. Thus, our contractarian manager will re-

quire more guidance to know when and how exit is

permissible and what steps should be required to

protect the involuntarily severed and those who

have come to rely on the contract.

Norm evolution

The second step in the ISCT decision logic concerns

identifying norms that are, at once, (a) commonly

288 R.A. Phillips and M.E. Johnson-Cramer

and freely accepted in the community, (b) relevant

to the decision at hand, and (c) legitimate relative to

universal hypernorms. Even in the static version of

ISCT, in which extant norms are the central con-

cern, this second step requires sophisticated moral

reasoning from contractarian decision makers. What

complicates the matter further, however, is the

uncertainty engendered by evolving norms. How is

a decision-maker to respond to this uncertainty?

And, what moral consideration must be given to

community members as they adapt to changing

norms? In this section, then, we move from dis-

cussing dynamism in the parties of the contract to

examining dynamism in the terms of the contract.

There can be little doubt that norms evolve.

Some change is purposive; it is the work of insti-

tutional entrepreneurs working to authenticate new

norms. (We discuss the problems raised by these

attempts in the next section). However, much

change is merely the result of evolutionary processes

by which social practices are selectively retained in a

given community. Given the dynamic nature of

norms, it is essential that we attend to what Nozick

(1974) calls the historic rather than the ‘‘current time

slice’’ perspective on norm generation. The empir-

ical fact of norm evolution becomes morally prob-

lematic insofar as a contractarian manager comes to

lack a valid standard by which to determine the

morality of proposed actions.

Recognizing this potential for indeterminacy,

Donaldson and Dunfee ask, ‘What if no authentic

norms exist?’ and go on to discuss several instances of

ambiguity or the absence of authentic norms,

including moments when (pp. 168ff ):

1. ‘‘...a community is closely divided over a dif-

ficult issue...’’ with ‘‘...no apparent consensus

supporting any particular approach.’’

2. ‘‘...new processes or techniques unveil novel

ethical issues where...there has yet to be a

coalescence of attitudes or behavior around a

particular solution.’’

3. ‘‘...an interim period in which there is a

gap or void while new norms replace long-

standing authentic norms.’’

Responding to these scenarios, they suggest that

decision makers (a) search for relevant hypernorms,

(b) look to other communities for dominant

authentic norms relevant to the situation, and, as a

last resort, (c) act consistently with the traditions and

values of their firms, even where those values and

traditions have not risen to the status of authentic

ethical norms.

We challenge both the description of the problem

and the proposed solutions. With few exceptions,

periods of transition are better characterized by the

existence of several competing norms rather than the

absence of norms. This vision of norm evolution

emerging from a contest among competing norma-

tive systems recurs in much of the institutional lit-

erature dating from the earliest studies of the

Tennessee Valley Authority (Selznick, 1949) and

endures through the most recent studies in that lit-

erature (for a review of the empirical findings on this

subject, see Scott, 1995). In one widely cited

example, Dimaggio (1991) depicts the struggles of

museum curators and other art museum profes-

sionals, portraying the co-existence of multiple

norms in vivid detail. These studies suggest repeat-

edly that the ambiguous moments engendered by

norm evolution do not represent the absence of a

norm (i.e., a ‘‘void’’ or ‘‘gap’’), but the simultaneous

existence of more than one proto-authentic norm.

In light of this reformulation of the problem, the

proposed solutions seem insufficient. First, though a

fine source of moral criticism in some instances,

hypernorms are less useful in evaluating and adju-

dicating between divergent norms that are all con-

sistent with hypernorms. We contend that using

such avowedly thin (and mostly negative) hyper-

norms as a source of evaluation will, at best, describe

which norms are morally wrong but will prove too

broad and too thin to guide the choice among

competing legitimate norms. Complicating this

picture further is the status of aspirational norms

(1999, p. 93). Insofar as competing microsocial

norms are frequently aspirational, setting out positive

principles to which a community should aspire ra-

ther than regulatory prohibitions, most of the hy-

pernorms cited by Donaldson and Dunfee are

particularly ill-equipped to adjudicate.

Second, the notion that decision makers may find

recourse, as Donaldson and Dunfee’s second and

third approaches to ambiguity suggest, in norms of

related communities raises the problem of what we

might term ‘‘meso-social contracts’’: the extant

norms in the broader, though not universal, com-

Dynamism in Integrative Social Contracts Theory 289

munities within which the micro-contracts are

embedded. Here we encounter a problem with the

specificity of norms. If the meso-norm is sufficiently

precise to guide decision making, a case can be made

that it is the operative norm and that the void or

conflict was only apparent rather than actual. If, on

the other hand, ‘‘the traditions and values of their

firms, even where those values and traditions have

not risen to the status of authentic ethical norms’’ are

as ambiguous as this description suggests, then such

traditions and values are as unlikely to guide deci-

sions as the ethical norms from which they are dis-

tinguished.

The underlying issue, made evident by the for-

mulation of norm evolution as competition rather

than vacuum, is the relative importance of multiple

levels of norms. ISCT bears many marks of the

influence of Michael Walzer, particularly from his

book Thick and Thin. Walzer writes, ‘‘Minimalism is

liberated from its embeddedness and appears inde-

pendently, in varying degrees of thinness, only in the

course of a personal or social crisis or a political

confrontation’’ (1994, p. 3). For Walzer, the thick is

prior to the thin, temporally and logically. This

contrasts with ISCT that has the thin, macrosocial

contract as logically prior both for norm generation

as well as when adjudicating between norms in dy-

namic contexts. For ISCT, the thin (i.e., broader)

community receives priority when norms conflict.

Donaldson and Dunfee, like Walzer, underempha-

size the mutual influence and prospects for change

when thick moralities converge and interact. This is

a more serious problem (and opportunity) for the-

ories of economic morality than for political phi-

losophy. A thinner level agreement is easier to

maintain among distinct nations than among busi-

ness partners whose engagement must necessarily

run deeper than ‘‘do no harm’’ or ‘‘respect rights and

sovereignty’’. ‘‘Thick’’ guides are necessary to

managerial decision-making.

Of course, the ambiguities created by evolving

norms do not end when the competition among

norms is resolved. An additional problematic result

of dynamism surfaces in the aftermath of changes

to the microsocial contract. At this stage, with a

new norm having been authenticated, the most

pressing question concerns the status of behaviors

once considered moral but now considered

counter-normative. Micro-norms, like all contrac-

tual terms, induce community members’ reliance

on them in planning for the future. Norms con-

cerning, for example, job security or retirement

benefits shape the behavior of community mem-

bers. And while a community (or, at least, the

majority of community members) may freely

choose to affirm a new norm concerning these

issues, this does not entirely resolve the treatment

of individuals who have acted or may continue to

act as if the former terms still applied. Put in terms

of contractual obligations, we might wonder what

consideration the community, or the manager

acting as an adjudicator on behalf of the com-

munity, owes to members who staked their

expectations on the community’s performance of

the original terms of the contract.

This question is further complicated by what

Boatright (2000) correctly identifies as the majori-

tarian impulse that undergirds ISCT, a charge that

raises important questions about binding all com-

munity members to those norms supported by a

majority of the community. Where Boatright’s

qualms may be dismissed with reference to hyper-

norms (cf. Donaldson and Dunfee, 2000: 484ff), we

focus on the narrower question of how to treat

members when their views lose authenticity but

retain legitimacy. In this dynamic scenario, where

the former norms were as legitimate as the new ones,

hypernorms are of little help. Left to judge the

morality of a possible action according to a newly

evolved set of majority-endorsed norms, our con-

tractarian manager must wonder whether there are

any lasting obligations to the minority of community

members who made decisions under the old con-

tract.

Revision mechanisms

Revision mechanisms, such as voice, surely play role

in our contractarian manager’s reasoning process.

We imagine several points before, during, and after

the ethical decision-making process at which the

desire to speak out in favor of normative change

might find voice or action. In their view of revision

in ISCT, Donaldson and Dunfee emphasize voice,

even civil disobedience, as a means for changing

microsocial norms. A community member, feeling a

desire to bring about some revision in the commu-

290 R.A. Phillips and M.E. Johnson-Cramer

nity’s norms, takes advantage of the right to express

voice (safeguarded by the provisions of the macro-

social contract). Over time, these efforts can lead to

changes in thinking and, ultimately, behavior among

community members. Thus, a lone voice may, in

the end, produce a new authentic norm. In most

examples cited in Ties, this revision mechanism is a

force for moral improvement in a community. The

change agent, freed of any moral obligation to be-

have consistently with a sub-optimal norm (by

whatever standards), countermands it in word and

deed, thereby rallying support for a new, also legit-

imate norm.

But there is also little guidance for where and

when a community member, convinced of the new

norm, can begin to behave consistently with it, and

lacking any guidance on the question, we confront a

logical problem of infinite regress. Without mem-

bers acting consistently with the norm, it can never

become authentic, but without a norm’s being

authentic, no moral actor can act consistently with it

(except if the previous norm is decidedly illegiti-

mate). The change agent who cannot behave con-

sistently with the norm she advocates finds herself

continually vulnerable to the charge of hypocrisy

and deprived of one of the most powerful tools of

persuasion: behavioral modeling (Cialdini, 1984).

Lacking these tools, it is particularly difficult to

create social change, especially given the weight of

the community operating in the other direction. For

example, we wonder about the limits of any com-

munity’s willingness to accept criticism of itself.

How many firms, for example, would hesitate to fire

a person for criticizing the company’s product to the

press (however valid those criticisms may be)?

As minor as they seem, these issues, when taken in

the aggregate, point toward a broader concern about

ISCT’s treatment of revision mechanisms: the charge

of conservatism. Long before Donaldson and Dunfee

articulated ISCT, Freeman and Gilbert (1988)

voiced their concern that reliance on accepted

norms and practices to guide moral decisions was an

‘inherently conservative idea’, which would leave

little room for criticism of extant norms and would

make impossible those efforts for improvement by

change agents discussed above. Of course, Donald-

son and Dunfee attempt to allay this concern by

suggesting that, under ISCT, leadership can occur

and be a force for moral improvement in the com-

munity (1999, p. 182); however, the fundamental

issue remains unchallenged. To the degree that

ISCT, by its very nature, (a) proves vague with re-

gard to the moral permissibility of certain change

efforts and (b) prevents the effective exercise of

moral leadership (thereby making such efforts less

likely to succeed), it remains exposed to the charge

of conservatism.

Of course, conservatism is not entirely bad, even

in the face of a dynamic normative landscape. There

is reason to believe that existing norms are best (i.e.,

most efficient, most environmentally adapted)

thereby justifying the perceived conservatism in the

theory. It may be claimed that the norms employed

within and among organizations became the norms

through a complex series of social and commercial

interactions. These particular norms emerged be-

cause they were either the best adapted to the

environment in question (Darwinian adaptability),

they were most efficient (economic adaptability) or

some combination (cf. Hannan and Freeman, 1977).

This historical perspective on norm generation and

maintenance suggests that the current norms play an

important role in maintaining the stability and effi-

ciency of social relations. Respect for how the norms

achieved that very status would advise caution and

particular attention to potential unintended or

unexpected consequences of revision mechanisms.

Yet, there are reasons to press for keeping ISCT’s

revision mechanisms available and sufficiently ro-

bust. We consider three: First, criticism of extant

norms is a central purpose of ethical theory in

business. Deprived of well-defined mechanisms for

formulating and expressing alternative ethical posi-

tions, our contractarian manager has little hope of

improving the ethical norms in a given community.

Second, if the empirical claims made above (but

admittedly untested in the literature) are borne out,

the institutional weight of communities is decidedly

against efforts to change. This being the case, there is

little reason to hope that a potential change agent

will ever rise beyond the status of vox clamantis in

deserto. Finally, given the essential role of co-opera-

tion in economic exchange, there is little incentive

for macrosocial contractors to accept a reality in

which conflicting views are likely to become

intractable. Yet, the revision mechanisms sketched

by ISCT portend just such a reality, in which either

persistent voice or sullen exit, are the primary tools

Dynamism in Integrative Social Contracts Theory 291

for change. As the discussion of revision mechanisms

in ISCT stands, voice appears a necessary if overly

simplistic and ineffective tool in the hands of our

contractarian qua change agent. Thus, in our search

for solutions to each of these problems (addressed in

the next section), we will pay particular heed to

those solutions which will maintain rather than

foreclose the opportunity for revision through

negotiated means.

Toward a dyanamic ISCT

Having outlined the challenges that dynamism pre-

sents the contractarian manager (and, by extension,

the social contracts theorist), we now offer sugges-

tions for addressing these challenges. In this section,

we specify four principles which would guide our

contractarian manager in the face of changing norms

and contracting communities:

1. A principle of stakeholder membership

2. A principle of maximum moral free space

3. An avorum principle

4. A principle of community discourse

Of course, these principles are not comprehensive;

they point toward possible ways of amending the

theory but certainly do not exhaust the possibilities.

They point in the direction of a more dynamic

ISCT; however, they are, at best, only the beginning

of a more thorough elaboration that might produce

alternative principles to improve ISCT’s ability to

deal with the challenges of dynamism presented

above.

As we have suggested, these principles may be de-

rived either from the nature of the contract as a

commitment device, as desiderata of macrosocial

contractors or some combination of these. It is

important to point out, however, that these principles

create a rebuttable presumption and should be con-

sidered as prima facie rather than conclusively binding.

That is, all of these (indeed all) principles and com-

mitments have a degree of contingency to them such

that they may be overcome by the force of better

reasons and other important considerations. How-

ever, the presumption created by the principles indi-

cates that the burden of justification falls to those who

would resist or deny their force or relevance.

A principle of stakeholder membership

Earlier, we discussed the challenges for ISCT in

determining community membership. Under the

current ISCT model, with its emphasis on exit as a

solution to conflict, either the community or the

individual member may define membership criteria

or choose communities in such a way as to alter the

parties to the social contract mid-stream. Clearly,

there is a pressing need for more normative guidance

in defining who is and is not a member of an eco-

nomic community. Such guidance would place

additional constraints on all parties to govern the

possibilities of unfair co-optation, involuntary exit,

and strategic switching as a means of shirking com-

munity norms. All of this amounts to a call for some

principle to guide community definition and to

define membership. For these constraints to have

sufficient moral force to guide behavior across

communities, they must originate somewhere be-

yond the local microsocial contract. We argue that

notion of reciprocity embodied in Phillips’s (1997,

2003) principle of stakeholder fairness offers some

foundation for constraining community definition

decisions on both sides of the contract. To articulate

this argument, we revisit the basic argument behind

stakeholder fairness, situate reciprocity – the foun-

dational premise of the stakeholder fairness argument

– in an ISCT context, and outline the implications

of reciprocity and fairness for the question of com-

munity membership in a dynamic world.

We begin by re-introducing Phillips’s (2003)

principle of stakeholder fairness. Responding to the

more particular question of how individual firms

should identify their stakeholders, he outlines a

principle of stakeholder fairness. He writes:

Whenever persons or groups of persons voluntarily

accept the benefits of a mutually beneficial scheme of

co-operation requiring sacrifice or contribution on

the parts of the participants and there exists the pos-

sibility of free-riding, obligations of fairness are cre-

ated among the participants in the co-operative

scheme in proportion to the benefits accepted.

That is, managers and organizations have prima facie

obligations to those from whom they have accepted

benefits. Though the extent and content of this

obligation must reflect the desires and inter-

subjective understandings of the parties to the

292 R.A. Phillips and M.E. Johnson-Cramer

contract (consistent with microsocial contracts), the

fact of the obligations and the identity of the parties

themselves are a matter of prior stakeholder obliga-

tion. Failure to recognize these obligations violates

not only the principle of stakeholder fairness but also

the more foundational value of reciprocity. Indeed,

the notion of fair treatment in economic life hinges

on reciprocity. Hume calls reciprocity the main-

spring of human sociality and it is a central moral

feature of all contracts – legal and social (see, e.g.,

Binmore, 2003).

This principle offers a starting point for consid-

ering how our contractarian manager might deter-

mine the relevant parties to a social contract and,

therefore, which community memberships are rel-

evant to a given decision. While Phillips frames the

stakeholder fairness principle in terms of the rela-

tionships between firms and their stakeholders, the

principle applies equally at other levels of analysis

and is multi-directional; it defines obligations for all

parties to a co-operative scheme. Thus, this principle

of stakeholder fairness represents a particular case of a

broader notion of fairness widely applicable to other

forms of economic community discussed under the

aegis of ISCT. The contractarian manager, asked to

identify the relevant communities to an economic

decision seeks out those parties from whose efforts

the organization benefits. Membership in these co-

operative schemes engenders obligations to abide by

the norms of these communities in exchange for

benefits received from fellow members in the co-

operative scheme. A manager may not strategically

redefine community membership without consid-

ering the moral implications of failing to reciprocate.

Thus, we offer a:

Principle of Stakeholder Membership – Membership in

an economic community is based on inclusion in a

co-operative scheme for mutual benefit. An eco-

nomic actor’s voluntary acceptance of benefits from

such a scheme generates obligations to follow the

norms of that community and to consider the well-

being of other such members in community-relevant

decision-making.

Our argument, premised as it is on reciprocity, is

well suited to dealing with dynamism in ISCT.

Specifically, there is a temporal element to reci-

procity that admits a more robust conception of

social contracts than Donaldson and Dunfee’s

framework of priority rules and preference for exit.

With reciprocity as a guide, the manager will not

view a one-time perceived violation of social con-

tract norms as prompting a complete re-evaluation

of the social contract or redefinition of the relevant

community memberships. Depending on the nature

(including duration) of the prior relationships and

previous actions relative to the norms in question, a

single perceived violation may be overlooked or its

importance attenuated. Repeated violations may be

necessary to invoke a deeper renegotiation. Thus,

social contracts exhibit greater resilience and com-

munity membership proves less ephemeral as parties

work out equitable levels of contribution.

This general principle for determining commu-

nity membership differs somewhat from Donaldson

and Dunfee’s approach. They rely on two sources:

states (‘‘national communities’’) and the discretion of

organizations. Relying on national communities to

dictate community membership is problematic.

Deeming the laws of the state part of moral free

space runs contrary to the historical use of the social

contract methodology. Hobbes, Locke, Rawls and

others used the social contract precisely to determine

the proper role of the state. Donaldson and Dunfee

blur the important distinction between the macro

and microsocial contracts by including national laws

as part of the microsocial contract (and thus part of

moral free space). More importantly, as current

business realities suggest, national boundaries mean

very little in considering the norms governing many

business transactions. Social contractors aware of

such business realities would no doubt anticipate that

the community definition problem would be more

rather than less acute where national norms are

themselves at issue. The strategic determination of

which norms apply to a given actor represents one of

the more common issues in international business

ethics.

If the nation-state can offer little guidance in

determining community membership, so too does

Donaldson and Dunfee’s second option prove prob-

lematic. They suggest that economic actors them-

selves might determine to which community (and

stakeholders) they owe obligations. That is, ‘‘Core

Principle of Generic Stakeholder Theory – B’’ states:

Where norms pertaining to stakeholder obligations

are not firmly established in the relevant sociopoliti-

Dynamism in Integrative Social Contracts Theory 293

cal communities, organizations have substantial dis-

cretion in deciding how to respond to stakeholder

claims and interests. (1999, p. 253f)

Reference to substantial discretion recurs through-

out the discussion. It is reasonable, however, for our

manager to seek more guidance than this from

ISCT. Who within the organization qualifies to

make such judgments? Is it managers (those with the

greatest power), employees (those with the greatest

numbers), shareholders and the board of directors

(those in whom the law reposes rights and privileges)

or some combination of these and other groups?

This Core Principle seems only to once again strain

the definition of community it is in part intended to

resolve. If, for example, employees are to be con-

sidered, it would be a curious outcome to discover

many organizations selecting an exclusive concern

for shareholder well-being.

Indeed, a theory prescribing that organizations

‘‘develop their own sets of values concerning

stakeholder interests...’’ may be criticized as not

especially helpful; and the risks that discretion would

lead to ambiguity and opportunistic behavior in

community selection increase.

We argue that reasonable and rational macrosocial

contractors would seek a better solution to com-

munity membership problems at the outset. The

differences among communities and their norms are

central to most discussions of ethics, as evidenced by

the centrality of relativism and pluralism in moral

discourse. Historically, conflicts among community

norms were commonly solved by withdrawal (or

armed conflict). Since there was little need for co-

operation, it was easier in some ways to fight for

one’s comprehensive moral scheme than to engage

the difficult work of seeking common ground. In

the case of commerce, however, greater co-opera-

tion is required. It does manufacturers little good to

see sub-contractors’ factories destroyed and

employees killed over a disagreement about what

constitutes human rights. And the mutual gains of

trade are forgone should disengagement and disin-

vestment result from disagreement. Ex post adjudi-

cation and rationalization of norms (see below)

provides an alternative to the emphasis on priori-

tizing and priority rules from ISCT. However, such

a process would need to rest on the common

agreement that reciprocity and fairness constitute the

basis for community membership.

Acknowledging the principle of stakeholder

membership as an addition to the ISCT frame-

work, however, does not entirely eliminate

ISCT’s admirable preference for ethical decisions

governed by local norms. Like truth-telling, the

sufficiency of reciprocation is often inconsistent

between communities. In a context of negotiation,

being less than perfectly transparent about some

aspects of one’s true position is counted a virtue.

So too if the truth will cause unnecessary or unjust

harm, communities may differ on just how starkly

the truth should be spoken. Similarly, different

cultures place different levels of emphasis on rec-

iprocity (e.g., consider the practice of gift-giving

in Japan relative to the U.S.). Moreover, reci-

procity is a norm that admits of myriad degrees –

reciprocation is not always a dichotomous

behavior in which it either occurred or did not.

Often failure to reciprocate is a matter of insuffi-

ciency rather than complete omission – that is, a

question of proportionality. If A has performed a

service for B and B returns the service to a degree

less than what A thought was proper, there arises a

question of whether this contract has been ful-

filled. This does not, however, make reciprocity

any less universal or foundational.

Being a friendly amendment to ISCT, the

principle of stakeholder membership leaves most

of the theoretical apparatus intact. Where might

this principle fit into ISCT? As our arguments

imply, we view reciprocity as a candidate for

hypernorm status (Becker, 1986). It certainly

meets the standards for a hypernorm as elaborated

by Donaldson and Dunfee (i.e., convergence of

religious, political and philosophical thought). In

addition to the central role reciprocity and mutual

benefit play in Phillips’s ‘‘principle of stakeholder

fairness,’’ they are also central to van Oosterhout

et al.’s (forthcoming) internal morality of con-

tracting.

Thus, we can imagine judging microsocial norms,

which violate reciprocity as illegitimate norms. At

the same time, we suggest that the same hypothetical

macrosocial contractors who agree upon the pro-

cedural need for voice and exit as precursors to norm

authentication would recognize the limitations of

this process (in terms of community definition) and

would bound the decision-making process by

defining membership more clearly. The principle of

294 R.A. Phillips and M.E. Johnson-Cramer

stakeholder membership serves this definitional role

and is a precursor to effective decision making under

ISCT.

A principle of maximal moral free space

The problem of norm evolution may be divided into

ex ante contestation among norms and post hoc

effects. In this section, we begin by considering the

contested nature of microsocial norms, which

emerge not in a vacuum but rather through a process

of contest among candidate norms. (The next sec-

tion addresses the post hoc effects). What guidance, if

any, might a dynamic ISCT provide to shape the ex

ante dimension of this evolutionary process? Specif-

ically, how might our contractarian manager best

negotiate a normative landscape characterized by

norms competing for wider recognition and often

varying across multiple levels of analysis? Inasmuch

as norms and communities are artificial, community

members, like our manager, have an important role

to play in the creation, maintenance and evolution

of community norms. What moral constraints might

macrosocial contractors consider to govern the

manager’s behavior in this dynamic landscape?

To answer these questions, we must consider the

relationships among communities at various levels of

analysis and the norms they generate. A central

feature of the ISCT conceptual apparatus concerns

the multiple levels of norm-generating communities.

From a more dynamic perspective, sensitive to how

contested norms emerge, these levels also represent

sources of competing norms. The central feature of

the relationship among these levels is the need for

moral free space in which microsocial contractors

act. The current formulation of ISCT is ambiguous,

however, regarding how much moral free space

should cascade downward through the contracting

levels, and the end result is a framework incapable of

governing the dynamic reality of normative conflict

and safeguarding the reasonable preferences of

macrosocial contractors.

Donaldson and Dunfee offer priority rules to

guide a decision maker in negotiating conflicting

norms. Among these rules are: (a) to ‘‘anticipate and

respond to classes of foreseeable conflicts between

their own norms and norms of other communities’’

(Priority Rule #2); (b) to choose more precise

norms over less precise ones (Priority Rule #6); and

(c) to give priority to those norms whose source is a

more global community (Priority Rule #3).4 In the

context of competing normative schemes hatched by

related but autonomous communities, the summa-

tive effect of this advice would likely be to create a

race to circumscribe moral free space. That com-

munity with the most expansive and exhaustive rules

limiting moral free space will be the community

whose rules are applied. Rather than extending

moral free space, such a rule would reduce it dras-

tically.

On the other hand, there are at least two reasons

to accept that macrosocial contractors would agree

to the need for moral free space. First, the notion of

free space is consistent with pragmatic experimen-

talism. Put simply, greater moral free space generally

allows for a wider diversity of norms and ways of

organizing economic life that can then be compared

and contrasted with one another. Eastman and

Santoro (2003) have elaborated on ‘‘the importance

of value diversity in corporate life’’ to which we

would add that greater moral free space also allows

for greater flexibility of norms for intercommunity

interaction.5 To enhance this spirit of experimen-

talism requires that priority rules urging a form of

normative imperialism, in which one community

has reason to attempt to over-specify its own norms

or to impose those norms on related communities,

play a less significant role.

Second, free space represents a commitment to

the maximization of liberty for all – itself a common

desideratum of macrosocial contractors (Rawls,

1971). Donaldson and Dunfee recognize this desire,

writing that ‘‘...preference should be given to norms

that do not adversely restrict the freedom of other

economic communities to create and support their

own norms.’’ (p. 45). To the extent that larger

norms are designed and intended to restrict the free-

dom of smaller communities, it is reasonable to ex-

pect that these hypothetical contractors would do

more to safeguard free space than merely to give a

vague positive moral primacy to microlevel norms.

They would agree upon additional provisions that

would dissuade limitations on this liberty and would

place the burden of justification for circumscribing

liberty in economic interactions on those who

would so limit. Thus we again resort to these mac-

rosocial contractors to suggest that the mechanisms

Dynamism in Integrative Social Contracts Theory 295

of ISCT would include some additional safeguard

making behavior contrary to extensive moral free

space the exception rather than the norm under

dynamic circumstances. In this spirit, we advance a:

Principle of Maximal Moral Free Space – elaboration of

broader norms must permit maximum space for

pragmatic experimentation at lower levels. The scope

of broad principles should tend toward thinness.

For our contractarian manager, this broad-ranging

principle has clear, if not altogether determinate,

implications. The demand of maximal moral free

space leaves this manager without resort to (occa-

sionally contradictory) priority rules, when faced

with competing norms. The challenge of reconciling

and specifying norms in satisfactory and mutually

agreeable ways devolves to our manager and other

community members.6 Moreover, our manager is

asked to reconsider any behavior that might impinge

on free space without first seeking resolution within

the community. Where priority rules de-emphasize

the prospects for finding a common or acceptable

middle ground between competing norms, the

manager operating under maximal moral free space

recognizes that recourse to priority rules, the priority

of larger communities and exit represent the failure

of voice and a failure to reach a (new) contract. This

principle also places heavier procedural requirements

(one of which we discuss further below), upon the

manager and the microsocial contracting commu-

nity. They now need to seek ways to facilitate voice

for community members working together to rec-

oncile competing norms. This procedural approach

to moral free space would clearly oppose firing un-

ion organizers, but would also include a positive

obligation to create more effective conduits for

voice.

In sum, though not rising to the level of a hy-

pernorm, the principle of maximal moral free space

represents one step toward guiding norm evolution

by shaping the ex ante process of norm generation. In

response to the dynamic reality that ISCT faces,

maximal moral free space protects the underlying

commitment to local norms and moral free space and

encourages the search for mutually agreeable mi-

crosocial norms. Thus, in suggesting it as a friendly

amendment to ISCT, we maintain that maximal

moral free space would be seen by the macrosocial

contractors as an important principle for operation-

alizing ISCT.

Avorum principle

The opposite aspect of the problem of norm evo-

lution concerns the post hoc effects of changing

norms. One of the more pressing challenges to a

dynamic ISCT regards the treatment of those who

consented to a prior set of contractual conditions but

now face a revised microsocial contract. Thus, for

example, changes to employee benefits such as

retirement plans represent a challenge, insofar as they

often require employees to accept less favorable

terms than originally agreed upon. In the language of

ISCT, these new terms may well rest on authentic

norms, insofar as a majority of younger employees,

for example, may favor certain revised plan provi-

sions, while only those few employees closest to

retirement find them unacceptable. ISCT currently

offers these employees (and, indeed, all community

members who suddenly find themselves in a

minority) with two options: voice and exit. The first

has proven challenging and the second leaves the

members significantly worse off than under the

terms of the prior social contract.

So, particularly in times of rapid transition of ei-

ther norms of, or parties to, the microsocial contract,

we argue that the prior terms of the contract (as well

as obligations of stakeholder fairness) demand some

concern for the well-being of those who reasonably

expected the terms of the former contract to con-

tinue. We contend that the solution to post hoc effects

must involve some provision to ‘‘grandfather in’’ the

prior terms of the microsocial contract or ‘‘grand-

father out’’ those involuntarily removed from the

community or the contractual terms to which they

were previously bound. In short, we suggest:

Avorum Principle – Those subject to social contracts

should make every effort to respect the former terms

of the contract during times of transition. Barring

this, some restitution or compensation should be

made for the breach.

Why should macrosocial contractors accept such a

principle as part and parcel of the ISCT framework?

We suggest two justifications for limiting the mi-

296 R.A. Phillips and M.E. Johnson-Cramer

crosocial community’s freedom to breach authentic

and legitimate norms: one rooted in the concept of

contracts and the other premised on the need for

internal coherence in ISCT. First, as the principle

itself suggests, much of its reasoning derives from the

conceptual nature of contracting. As we argued

earlier, it is implicit to the notion of contract that the

parties commit themselves to a restriction of their

liberty for the purpose of mutually beneficial inter-

action. A contract affords a secure promise of future

benefits even in the absence of additional negotia-

tion, and the ability to alter the terms of, and parties

to, the contract unilaterally and without compensa-

tion violates the very purpose of contracting. To

accept free breach ignores the temporal nature of

reciprocity, discussed above, which requires that

both the initial provision of benefits and the future

response in kind, be considered as part and parcel of

the same interaction.

Free breach also undermines the basic notion of

promise-keeping. Promise-keeping is central to

contracting, morally axiomatic and most likely a

hypernorm.7 Contracts, including social contracts,

may reasonably be considered a promise of a sort.

Violating or unilaterally altering the terms or parties

to a contract may just as reasonably be considered a

failure to keep a promise. Ultimately, in the face of

such untenable moral implications, we contend that

no reasonable contractor (in the macrosocial sense

envisioned by ISCT) could possibly agree to a sys-

tem in which the notion of a contract itself had no

moral force.

Second, the concern for post hoc effects rests as

much on procedural concerns as substantive ones.

The morality of depriving minority community

members of expected claims or benefits relies on

ISCT’s procedural adequacy in governing the

change process. Obviously, as Donaldson and

Dunfee argue, macrosocial contractors would dem-

onstrate the highest sensitivity to procedural justice

in the generation of authentic microsocial norms.

The voice requirement represents a significant arti-

fact of this commitment. Yet, the revision processes

which produce free breach are worrisome not only

for their material impact on minority members but

also for the overly optimistic view of the mecha-

nisms that bring about normative changes. Those

who might advocate free breach must be particularly

sanguine about the prospects for ex ante debate and

deliberation. Unfortunately, this faith that economic

actors, such as corporations, will necessarily allow a

free and fair discussion of a new policy (e.g., a re-

vised retirement plan) flies in the face of empirical

reality (Johnson-Cramer, 2003).

At least two matters merit mention in the context

of the avorum principle: efficient breach and reliance

on illegitimate systems. First is the concept –

examined at some length by scholars of law and

economics – of efficient breach.8 With some regu-

larity, cases arise for which it is more efficient (or

cost effective) for one party to break a contract even

when this includes forgoing the contractual consid-

eration or even paying penalties for failure to per-

form according to the terms of the agreement.

Fairness concerns play a limited role in discussions of

efficient breach. This concept may be fruitfully ex-

tended to the case of social contracts of the sort

considered here. As Donaldson and Dunfee are

aware (1999, p. 117ff ) issues of efficiency must be

balanced with issues of distributional and procedural

fairness. Avorum more explicitly addresses issues of

contractual equity as well as alters somewhat the

calculus of efficient breach by including a require-

ment to compensate those parties reliant on the

fulfillment of the contract upon breach.

Also, some might point to specific instances in

which adherence to the avorum principle would be

morally undesirable or, at least unnecessary. Avorum

is morally undesirable in the case when new norms

represent obvious moral improvements. After all, to

protect prior contractual claims in such a circum-

stance would be to give license to continue to act in

an illegitimate way (i.e. contrary to some universally

agreed hypernorm). Thus, neither the former

slaveholders in the post-Civil War South nor exec-

utives in this post-Sarbanes-Oxley era should enjoy a

grandfathering into the old norms of slavery and fi-

nancial opacity.9 Avorum is, likewise, unnecessary

when new norms arise to address situations not

previously foreseen under the old norms.

We respond to these concerns with two further

qualifications. First, we emphasize that the basis for

avorum is not merely that community members

should not have to deal with changes to the social

contract but rather that, having subscribed to an

equally legitimate expectation, community members

merit some protection. Clearly, both slavery and

graft fail this test and do not receive the protection of

Dynamism in Integrative Social Contracts Theory 297

avorum. They represent illegitimate behaviors relative

to universal hypernorms, and no one should expect

that the de-authentication of norms supporting these

behaviors will generate avorum claims. We would

also emphasize that avorum, though prima facie

binding, also admits the possibility of stronger

counter arguments and considerations. There may

be compelling reasons in some instances for not

recognizing prior terms as binding, but the burden of

justification is, once again, on those who would

override the principle.

Efficient breach of social contracts and the role of

ISCT’s efficiency hypernorm as well as reliance on

illegitimate prior terms could occupy entire essays in

their own right. For current purposes we merely

wish to suggest that this principle is inadequately

addressed in most contractualist or contractarian

theories. To be consistent with the contract meta-

phor, prior parties and prior terms may not be simply

ignored or annulled.

A principle of community discourse

To this point, it is clear that one of the primary

challenges wrought by introducing dynamic ele-

ments to the normative landscape of ISCT is the

greater burden placed on microsocial communities

to revise norms fairly. ISCT offers much to help

addres this challenge. And as our contractarian

manager goes about the business of advocating

normative changes, the requirements of allowing

voice and exit constrain that manager’s entrepre-

neurial spirit to a degree. The manager is thus

bound to seek ‘‘a process or broad framework by

which moral rules will be established under

appropriate circumstances.’’ (Donaldson and Dun-

fee, 1999, p. 37). As we have argued above,

however, problems still arise. In particular, the

requirements entailed in ISCT’s definition of

authentic norms offer little assurance either that

managers will entertain those opinions voiced by

community members or that there is any escape

from the infinite regress by which suggested nor-

mative changes can never be morally enacted. How

should social contract theorists avoid the problems

of deaf managers and infinite regress entailed in the

revision mechanisms of ISCT?

What makes this problem particularly compelling

is that it forces social contract theorists to wrestle

with the realities of power relationships, which

business ethicists are historically loathe to address

(Phillips and Margolis, 1999). The provision of

procedural safeguards is a clear element of good faith

community interaction and is also an important

consideration in any circumstance where a majority

of community members might rightly impose

requirements on others. It is true enough that appeal

to hypernorms insulates ISCT from charges of being

overly majoritarian and ignoring minority rights.

However, by resting the authentication scheme on

the principles of free exercise of voice and majori-

tarian principles, ISCT must also address a challenge

long recognized by democracy theorists (e.g., Gut-

mann and Thompson, 1996): that voice and voting

rights (however hypothetical) rarely constitute a

sufficient apparatus for just decision-making. This is

especially true in the economic context where we

cannot assume that decision processes are based on

explicitly democratic premises. The solution, then,

to the concerns raised by dynamic ISCT, in general,

and the dysfunction of revision mechanisms, in

particular, must necessarily involve less content-

dependent procedural principles.

Here we join Calton (2001; see also Calton and

Payne, 2003) and others in calling for greater

attention to dialogue as an important addition to a

dynamic and practical ISCT. Where some (Johnson-

Cramer, 2003) emphasize dialogue as an element of

the particular interactions between firms and their

stakeholders, we suggest that, for the contracting

process to work in the way envisioned by macro-

social contractors, the notion of dialogue must apply

broadly to all economic communities in which

authentic norms are generated. Thus, we suggest a:

Principle of Community Discourse – Particularly in times

of conflict and transition, parties to the must contract

to create systems for the exercise of voice.

Again we resort to the contractarian’s preferred

question: What sort of procedural safeguards would

macrosocial contractors specify? Failure of the con-

tractors to make allowance for solving the problems

of infinite regress and deaf majorities represents a

blind-spot for ISCT. A central tenet of ISCT – a

tenet that is further bolstered by the principle of

298 R.A. Phillips and M.E. Johnson-Cramer

maximal moral free space presented above – is that

local norms should be the primary source of moral

guidance for economic actors. The norms generated

at the microsocial community obviously do matter;

and for any number of reasons, not least of which is

the viability of economic exchange, these norms

should matter. Such, in any case, would be the

conclusion of macrosocial contractors. Yet, these

contractors would not be entirely indifferent to the

content of these norms (cf. van Oosterhout et al.,

forthcoming). For example, they would care that

microsocial communities with obviously illegitimate

norms not only incur the moral disapproval of

society but also, sooner or later, come to revise those

norms. Thus, the procedural mechanisms, though

themselves independent of moral content, are a

moral necessity. Macrosocial contractors would care

if the procedural mechanisms put into place to en-

sure revision of illegitimate norms actually work. If

managers, for example, are allowed merely to turn a

deaf ear on a stakeholder group’s exercise of voice,

the mechanisms simply will not work.

Of course, there is much more to be said on the

matter of community discourse, in general, and

stakeholder dialogue in particular. Already some

theorists are seeking ways to incorporate this insight

at the societal (Calton and Payne, 2003), firm-

stakeholder (Johnson-Cramer, 2003), and organiza-

tional (Smith, 2004) levels. This principle does not

solve every problem associated with the revision

mechanisms. We leave open, for example, the

question of infinite regress, except to say that in

contracting communities characterized by dialogic

interaction we might expect to encounter such sit-

uations – i.e., where dissenters must determine

whether or not to behave in ways inconsistent with

local norms in order to effect change – far less fre-

quently. Yet, we are confident that a principle of

community discourse has a role to play in making

ISCT more resilient and better equipped to handle

the dynamic realities of norm revision mechanisms.

Conclusion

Novel theories often rely on somewhat static con-

ceptions of the relevant context as a simplifying

assumption; the novelty provides more than suffi-

cient complexity. And later commentators pointing

out challenges that emerge under conditions of

dynamism is by no means original to this paper. That

said, allowance for change often leads to a more

nuanced and useful theory. In this paper, we have

begun considering the challenges to and prospects

for a dynamic ISCT. Among the challenges we have

described are:

(1) The definition of community membership

needs revision as the roster of members, the

criteria for membership and the priority of

different community norms to which mem-

bers are obliged all ebb and flow;

(2) The evolution and emergence of norms

within and among organizations when there

are several candidate norms that are equally

legitimate by the standards of thin, universal

hypernorms; and

(3) The rules and limits that should govern the

actions of those who would purposely set

out to alter legitimate and authentic norms.

By way of preliminarily addressing these problems,

we have suggested four principles that should be

considered part of a greater appreciation of dyna-

mism in ISCT. Specifically:

(1) A principle of stakeholder membership

(2) A principle of maximum moral free space

(3) An avorum principle

(4) A principle of community discourse

This discussion included a brief elaboration of how

these principles fit within ISCT and the implications

of each principle for moral decision-making in

economic and organizational contexts.

Concluding a response to early critics of Ties that

Bind, Donaldson and Dunfee (2000, p. 483) caution

that, ‘‘ISCT is not intended to be a simply focused

calculus for making ethical judgments bereft of hard

thinking and careful judgment. It is best to view

ISCT as pointing the way toward what counts as a

careful judgment in business ethics.’’ ISCT, they

contend, is not meant only to provide a few priority

rules by which managers can mechanically turn out

an ethical decision. Our reliance on a hypothetical

contractarian as a rhetorical signpost notwithstand-

ing, we have argued that the natural dynamism that

characterizes the normative landscape (particularly in

Dynamism in Integrative Social Contracts Theory 299

economic communities) creates significant demands

on ISCT as a framework for guiding ethical thought

in business. In response to these demands, we have

proposed several principles that help to fill the gaps

in ISCT while allowing it to stand as a useful and

more readily applicable theory.

True to ISCT’s emphasis on the judgment of

managers, however, we have not sought to offer that

contractarian manager a recipe for ethical decisions.

Donaldson and Dunfee make good use of the word

‘‘judgment’’ throughout Ties that Bind. With this

term, they recall an Aristotelian approach to intra-

personal selection of appropriate moral norms and

communities (Hartman, 1996; Solomon, 1993).

Eventually, most managerial moral decision making

must redound to an exercise in judgment. This is

certainly the case for our exposition here inasmuch

as we have claimed that our candidate principles are

only prima facie binding. Perhaps the most we can do

is to help guide this managerial judgment by elab-

orating upon compelling and convincing consider-

ations to aid such judgment. In this vein, we have

sought, here, to better define and bound the context

in which that manager will exercise judgment, gui-

ded by ISCT. We have also not attempted an

exhaustive catalog of theoretical concerns (much less

solutions) for a more dynamic ISCT. Our hope for

this essay is that it contributes to framing these

concerns and point toward some potential remedies.

Given the subject of this special issue, which fo-

cuses on the application of social contracts theory,

we would also suggest that the insights of this article

open the way for a more sophisticated treatment of

many aspects of contemporary business behavior.

We cite two in particular. First, a popular topic of

discussion in management and organization studies is

that of organizational change (Kotter, 1996). Despite

the continuing popularity of the subject among

scholars and managers alike, there has been, to date,

little consideration given to the moral implications

of leading and managing change in organizations.

Aided by our conception of social contracts as dy-

namic, future researchers might ask: To what degree

are managers bound by community norms during

restructuring? What role should leaders and other

change agents play in framing new standards for

community membership and in revising community

norms?

Second, on the increasingly vital subject of em-

ployee benefits and retirement security, recent

trends toward the reduction and even elimination

of retirement benefits raises particularly difficult

questions concerning the continuing obligations of

managers even as community norms continue to

evolve. What consideration do firms owe to long-

term employees who have staked their retirement

fortunes to the authentic terms of the social contract

prevalent during the greater part of their tenure at

the company? Are there procedural obligations the

firm must offer in order to provide an opportunity

for such employees to influence the revision of these

social contracts? Such application questions will offer

full airing to the ISCT model and, in particular, to

the supplementary principles that we have suggested

above.

Ultimately, new models in perhaps every field of

inquiry begin with implicit assumptions about

change, envisioning a static reality rather than a

dynamic one. In light of the complexity with which

such models must typically contend, assuming away

change is a natural simplifying assumption. ISCT is a

sophisticated and subtle theory of organizational,

economic and commercial ethics. We would prefer

this paper be considered less pale critique and more

suggestion for further advancing a useful and

instructive framework.

Notes

1 The authors wish to thank the conveners of and par-

ticipants in the Zicklin Center’s ‘‘Contractarian Ap-

proaches to Business Ethics’’ conference at the Wharton

School for their comments on an earlier draft of this

work. In particular, we are grateful to Thomas Donald-

son, Thomas Dunfee and William Laufer for their sup-

port of this work. We are also grateful to Troy Harting

and the editors Hans van Oosterhout, Pursey Heugens,

Muel Kaptein as well as the anonymous reviewers for

their helpful comments.2 Van Oosterhout et al. cite Fuller’s (1964) use of a

similar method for seeking the morality implied by the

concept of law. Other relevant examples of such analy-

sis include Habermas’s (1990) examination of the com-

mitments entailed by the use of discourse and

McMahon’s (1981) discussion of the implicit morality of

the market.

300 R.A. Phillips and M.E. Johnson-Cramer

3 An additional challenge that we shall not address

arises from the emergence of networked, ‘‘virtual’’

organizations for which the boundaries of the organiza-

tion itself are somewhat blurry. This creates additional

difficulties in determining community membership. For

current purposes, we assume that, at least, the bound-

aries of the organization can be discerned and focus on

issues of membership in these organizations.4 It is worth noting that rules (b) and (c) will tend to

contradict each other. If Donaldson and Dunfee, like

Walzer, are correct to assume that more global norms

tend to be less precise – thin morality being more general

than thick – then telling a manager to always choose the

general and seek out the most precise seems to be like

telling them to take the fastest route but always choose

the horse and buggy. For the moment, we can ignore

this contradiction because following either priority rule

has the effect, in a dynamic setting, of inviting the man-

ager to abandon the principle of moral free space.5 Organizations with a diversity of norms and perspec-

tives may benefit in the same way ecosystems benefit

from biodiversity, though a more thorough elaboration

of this analogy must await another venue.6 We acknowledge, but do not address, the likelihood

that maximal moral free space may facilitate the prob-

lem of ‘‘community shopping’’ described earlier.

Thanks to Troy Harting for pointing out this uncom-

fortable tension.7 Thanks to Troy Harting for making this point clearer

to the authors.8 Thanks to Hans van Oosterhout for this point.9 Thanks to an anonymous reviewer who suggested

both examples.

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Robert A. Phillips

Robins School of Business,

University of Richmond,

Richmond, VA 23173,

U.S.A.

E-mail: rphilli3@richmond.edu

Michael E. Johnson-Cramer

Department of Management,

Bucknell University,

Taylor Hall, Room 322,

Lewisburg, PA, 17837,

U.S.A.

302 R.A. Phillips and M.E. Johnson-Cramer