Q Academy of Management Review2016, Vol. 41, No. 2, 216–228.http://dx.doi.org/10.5465/amr.2016.0012

INTRODUCTION TO SPECIAL TOPIC FORUM

MANAGEMENT THEORY AND SOCIAL WELFARE:CONTRIBUTIONS AND CHALLENGES

THOMAS M. JONESUniversity of Washington

THOMAS DONALDSONUniversity of Pennsylvania

R. EDWARD FREEMANUniversity of Virginia

JEFFREY S. HARRISONUniversity of Richmond

CARRIE R. LEANAUniversity of Pittsburgh

JOSEPH T. MAHONEYUniversity of Illinois at Urbana-Champaign

JONE L. PEARCEUniversity of California, Irvine

In this Introduction to the Special Topic Forum on Management Theory and SocialWelfare, we first provide an overview of the motivation behind the special issue. Wethen highlight the contributions of the six articles that make up this forum and identifysome common themes. We also suggest some reasons why social welfare issues are sodifficult to address in the context of management theory. In addition, we evaluatemeansof assessing social welfare and urge scholars not to make (or imply) unwarranted“wealth creation” claims.

Over a decade ago, Walsh, Weber, andMargolis (2003) lamented the lack of attention tosocial welfare issues by management scholars.Using data ranging from the research topics ofpaperspublishedinmajor journals tomembershipinvariousAcademydivisions, theymadeastrongcasethat organizational scholarship had drifted from itsroots—which had emphasized both the social andthe economic objectives of organizations—to focusoverwhelmingly on the economic objectives alone.Thisdriftwasregrettable, in theirview,bothbecauseit limited the range of intellectual inquiry in organi-zational studies and because it meant that the find-ings of organizational scholarship were not being

applied inways thatmight result in better societies.Two years later, the Academy of ManagementJournal (AMJ, 2005) published a special forum onorganizational research in the public interest,again calling for more consideration of socialwelfare in organizational research.BothWalsh et al. (2003) andmany of the authors

in the AMJ special forum called for an integrationof social and economic objectives. Neoclassicaleconomists might have suggested that this callwas/is unnecessary. A market-oriented economicsystem has been defended from a number of per-spectives, including the protection of politicalfreedom through economic freedom, the pro-tection of property rights, and the honoring ofcontractual obligations. But an important foun-dational justification for the system is based onutilitarianism, the moral philosopher’s term for

Lynn Stout, originally a special issue editor, also madecontributions to this special topic forum. Judith Edwards con-tributed several editorial refinements.

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social welfare—sometimes expressed as thegreatest good for the greatest number. More par-ticularly, a version of market capitalism thatclosely approximates neoclassical microeco-nomic models of perfect competition—for exam-ple, competition based on price, a laissez-faireapproach to governmental involvement in theeconomy, and a profit (or shareholder wealth)maximization objective for firms—is posited toproduce high levels of social welfare because itputs society’s resources to their most efficientuses. In short, social objectives couldbeassured ifeconomic objectives were attained (Jensen, 2002).

Unfortunately, there are several reasons to doubtthat this relationship is applicable in today’s econ-omy. First, as we discuss more fully below, thecharacteristics of modern market capitalism bearlittle resemblance to the conditions underwhich theperfect competition model assures social welfare.Thisdivergenceof conditions strongly suggests thatthe model’s prescriptions—in particular, laissez-fairegovernmentalpolicyandashareholderwealthmaximization objective for corporations—are un-likely to lead us to ever-increasing levels of socialwelfare.

A second and related point is that a substantialnumber of scholars, practicing managers, and en-trepreneurs are actively engaged in making theperfect competition model even less applicable tothecontemporary economy.Agreatdeal of researchin strategic management—that is, the search forsustainable competitive advantage—depends onmarket conditions that deviate significantly fromthose of perfect competition and, in some cases, in-volve an intention to carve out “mini-monopolies” inorder to obviate competition based on price alone.1

While it may make sense to explore means ofexploiting market frictions to enhance firm profit-ability or start new ventures, determining whethersocial welfare improves is an empirical question;simply assuming that social welfare is enhanced inconjunction with improved profits is inappropriate.

Third, it takes a substantial leap of faith to con-clude that some corporate actions taken to increaseshareholder wealth actually improve social wel-fare. Consider the case of massive layoffs. Theseactions often do result in increases in shareholderwealth (via stock price increases), but they also re-sult in substantial hardships—economic, social,

and psychological—for the displaced workers andfor the surviving workers who must take on the re-sponsibilities of their former coworkers. Thus, it isnot clear that all massive layoffs that enhanceshareholder welfare simultaneously enhance so-cialwelfare, even in the long run. Indeed, JonesandFelps (2013b), using stakeholder happiness as theirmeasure of social welfare, suggest that society asa whole may be made much worse off by massivelayoffs, at least in the short run. A similar calculuscould be applied to corporate practices at extremeends of a “potential harm spectrum.” Hiring con-tractors of questionable repute to dispose of haz-ardous wastes might anchor one end of thisspectrum.Cuttingcostsby increasingwait times forcustomer service calls might anchor the other end.In both cases externality costs (to the environmentand customers, respectively) are incurred andshould be included in social welfare calculations.Finally, the wisdom of relying on a model that fo-

cuses exclusively on alleviating economic scarcityno longer makes sense. Throughout much of history,economic scarcity was a pressing social problem,andanapproachfocusedonaddressingscarcitymayhave been defensible, despite the social welfareproblems created in its wake. However, now thatmaterial abundance better describes aggregate out-comes in most developed economies, social welfareproblems, new and ongoing, are less easily dis-missed. Some of these problems have emergedwitha vengeance, particularly in the United States—forexample, scandals involving enormous sums ofmoney, increasing inequality of wealth and income,underemployment, homelessness among formermembers of the middle class as well as the chroni-cally poor, soaring health care costs, and a politicalsystem closely tied to the vested interests of corpo-rations and wealthy individuals. Thus, although themarket-oriented economic system has an enviablerecord of making its citizens collectively richer, it isincreasingly questionable whether it is capable ofaddressing some other urgent social welfare prob-lems that have emerged from the relationships be-tween the economy and the rest of society.Nonetheless, despite calls from scholars repre-

senting a range of disciplines (AMJ, 2005; Walshet al., 2003) and the noble vision of the Academy ofManagement—“We inspire and enable a betterworld through our scholarship and teaching aboutmanagement and organizations”—the manage-ment literature has been remarkably quiet on therole of managers and corporations in first creatingand now solving the problems that threaten social

1 While lower prices have conventionally been associatedwith social welfare, product variety can also be a source ofsocial welfare benefits (Dixit & Stiglitz, 1977; Spence, 1976).

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welfare. Indeed, little appears to have changedsinceWalsh et al. lamentedan “eerie silence” in themanagement literature with respect to issues ofhuman welfare at the societal level and urgedmanagement scholars to “bring social welfare backin” to their research agendas, most importantly byintegrating social and economic objectives (2003:860; 875). In thisspecial topic forumourobjective is tohelp fill this void by encouraging theoretical workthat addresses important social welfare issues re-lated to the activities of large corporations in theeconomy and of those whomanage them. In a latersection we will address the “eerie silence” issue.

NEW APPROACHES TOMANAGEMENT THEORYAND SOCIAL WELFARE: THEMES

AND CONTRIBUTIONS

In examining the various perspectives taken byour contributing authors, two themes emerge.First, fairness and justice are argued to be im-portant elements of socialwelfare; in otherwords,utilitarian measures of aggregate well-being—either economic (e.g., GDP) or human happiness(e.g., stakeholder happiness)—are not adequatemetrics for social welfare.

In two of the included articles—Marti andScherer (2016) and Mitchell, Weaver, Agle, Bailey,and Carlson (2016)—the authors argue that socialwelfare should not be understood in terms of eco-nomic welfare alone, at least not in terms of ag-gregate economic wealth (e.g., GDP). Marti andScherer address the issue of financial regulation,beginning with an argument that social welfare isbest seen in terms of three elements: efficiency(with a long scholarly history), stability (witha much shorter history), and justice (their maintheme). Mitchell and colleagues make a case fora pluralistic view of social welfare. In the process,they find flaws in both economic welfare maximi-zation (through shareholder wealth maximization;e.g., Jensen, 2002) and stakeholder happiness en-hancement (Jones & Felps, 2013b).

Justice, Fairness, and “Many Objectives”

Marti and Scherer (2016) begin by elaboratingon the argument that social science theories notonly describe social reality but also shape it.Withthis insight in mind, they raise the vital norma-tive question, “How should these theories shapeour world?” In their illustrative example theseauthors show how financial regulation has, up

to the present, focused primarily on economic ef-ficiency, with an occasional nod to economicstability. Building on thework of Habermas (1971),they argue that social welfare has three majorcomponents: efficiency, stability, and justice.While stability has clearly taken a back seat toefficiency (witness the financial meltdown of2008), in the perspectives of both scholars andregulators, justice has been given no seat at all.Marti and Scherer submit that a very importantquestion should be added to the list of regulatoryconcerns: Does the proposed regulation make theeconomy more just? For management theoriststhis question could be distilled to how the pro-posed regulation of financial innovations—high-frequency trading in their example—affects topincomes and income inequality. In essence, theauthors question whether social welfare is actu-ally enhanced, irrespective of efficiency im-provements and stability preservation, if thegreat bulk of the benefits flow to those alreadywell off. Ultimately, theyadvocate an inclusive (asopposed to a technocratic) approach to financialregulation, one that focuses on both the ends andthe means of promoting social welfare. Distribu-tive justice, in the form of income inequality, alsoplays a prominent role in Cobb’s (2016) contribu-tion, discussed below.Bosse and Phillips (2016) argue that if in our

dominant theory of corporategovernance—agencytheory—wereplacedtheassumptionofnarrowself-interest with one of self-interest bounded by normsof fairness, then positive reciprocal behaviors onthe part of managers could be increased and neg-ative reciprocal behaviors could be reduced. Thischange in assumptions could not only enhance ourability to understand some anomalous agencytheory–based empirical results but also could in-spire corporate boards to base executive con-tracts on a well-documented human behavioraltendency—a quest for reciprocity and fairness—and achieve social welfare gains through agencybenefits, as well as through the avoidance of de-structive agency costs based on “revenge.”Finally, Mitchell and colleagues (2016) address

themetaphysical specter that haunts discussionsof economic welfare—namely, the question of“one” versus “many.” Having more than one ob-jective aggravates complexity in decision mak-ing, and it is not surprising that amajor strengthoftraditional neoclassical economic theory residesin its use of a single-valued metric—that is,“happiness” in nineteenth-century utility theory

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and its twin concept, “marginal utility” (measuredthrough preference rankings and indifferenceconcepts), later on.

How about the corporation? Do we need a singleyardstick or many yardsticks to evaluate its contri-bution to social welfare? Jones and Felps (2013a,b)haveargued that corporateaction requiresasingle-valued objective that allows managers to makeprincipled choices among policy alternatives andthat functionsas ananalog to the normativemaximthat managers should optimize value for the firm’sequity owners. In contrast, Mitchell and colleaguesmaintain that adopting a multi-objective approachto managerial decision making permits the en-gagement of a broader array of market-enhancingpreferencesandmarket signalsandallowsamoreinclusive process that enhances multidimensionalsocial welfare. The authors envision an intra-corporate “marketplace” inwhichmanagersengagecompeting objectives. They argue that invokinga single-valued corporate objective would onlyhamstring the virtuous process of social welfareenhancement made possible by the existence ofintracorporate markets among stakeholders.

Organizational Processes

Second, several of the authors focus on theprocesses by which the twin objectives of eco-nomic and socialwelfare are enacted. Sonenshein(2016) explains how the perceived illegitimacyand equivocality of social issues act as deterrentsto increased corporate attention to activities thatenhance social welfare (beyond economic). Issueillegitimacy refers to perceptions that allocatingresources to a particular issue falls outside ofa justifiable basis for firm action, whereas issueequivocality deals with disagreement regardingthe meaning of an issue, including its purpose,scope, and implications for the firm. In addition,Sonenshein’s article offers a meaning-makingperspective that unpacks how social changeagents can overcome these impediments throughlinking specific tactics (framing, labeling, im-porting, and maintaining) to different types ofsocial issues (convertible, blurry, risky, or safe).The author also explores the multiple levels ofmeanings that shape a social issue, includingvery macro levels, such as economic philoso-phies, and verymicro levels, such as individuals’beliefs. One of themany novel ideas advanced inthe article is that although issue equivocality isoftenperceivedasan impediment to action, it can

alsoprovideanopportunity for social changeagentsto favorably shape the meaning of a social issue,thus leading tocorporateactions thatenhancesocialwelfare.At the firm level, process is also a focus of

Bridoux and Stoelhorst (2016), particularly withregard to a firm’s relationshipswith stakeholders.These authors employ relationalmodels theory tocreate a hierarchy of relational modes based ontheir joint value creation capacity. In the contextof knowledge-based firm/stakeholder endeavors,communal sharing relationships are shown to besuperior to equality matching, authority ranking,and market pricing relationships. The choiceamong these relational modes is influenced bystakeholder perceptions of the model that aremade salient by the firm’s behavior. The authorsalso argue that there is a tendency towardmarketpricing when the behavioral standards of theother modes are not met.Finally, Cobb (2016) examines employment

processes and how they contribute to, or un-dermine, social welfare. A central social welfareconcern has been the growth in income inequalitythroughout the world. Heretofore, most commen-tators seeking to understand income inequalityhave focused on government policy, technology,or economic explanations to try to understand thegrowth in income inequality. Cobb demonstrateshow scholars of organization and managementcan contribute to our understanding of this chal-lenge. He argues that thewaymanagers structurethe employment relationships in their organiza-tions is a key factor in producing relative societalincome inequality. His theory contains severalinsights suggesting fruitful further research inmanagement, as well as public policy recom-mendations. For example, he demonstrates howthe spread of nominally market-focused com-pensation practices such as pay-for-performance,external hiring, and pay benchmarking lead togreater inequality within occupations, and moststarkly within organizations. While managementresearchers have long documented the damagesuch systems can do to the collaboration onwhich organizational performance depends (e.g.,Lawler, 1971; Pearce, 1987), Cobb draws ourattention to the larger social welfare costs of suchsystems. Similarly, he documents how differ-ent ownership forms (e.g., private equity owner-ship) drive the management external orientationthat exacerbates income inequality. His workopens a promising new avenue of management

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research and brings our understanding of orga-nizations to bear on a central public policy con-cern in many countries.

We were somewhat surprised that none of thesubmissions addressed (1) the role that religioncould play in the relationship between manage-ment and social welfare, particularly in view ofthe recently created Management, Spirituality, &Religion Interest Group of the Academy of Man-agement, or (2) possible single-valued corporateobjectives that include a stronger social welfareorientation (under the assumption that share-holder wealth maximization [e.g., Jensen, 2002]and stakeholder happiness enhancement [ Jones& Felps, 2013b] do not exhaust the possibilities).In the former case, social welfare is inherentlyvalues based, and religions are inseparablyconnected to values. In addition, some religiousorganizationspursuesocialwelfare throughmanytypes of programs in local communities andoften worldwide, providing potential models forother organizations, including businesses. In thelatter case, Walsh once called the corporate ob-jective issue “arguably the most important theo-retical and practical issue confronting us today”(2004: 349). In addition, whatever their shortcom-ings, single-valued objectives do have the benefitof radically simplifying both management prac-tice and management scholarship. Furthermore,multiple corporate objectives could be interpretedto mean that the pursuit of any one of them is ac-ceptable or, more cynically, that there is no objec-tive at all. Given the impetus of this special topicforum, perhaps future management scholarshipwill address these neglected themes.

WHY THE EERIE SILENCE?

As noted above, Walsh et al. (2003) claimed thatthere was an “eerie silence” among managementscholars with respect to issues involving socialwelfare. If this is still true (and we believe it is), animportant question emerges: Why have manage-ment scholars made so little progress in address-ing socialwelfare problemsand,more specifically,integrating social and economic objectives? Herewe suggest some reasons why this silence existsand, by extension, why it may emerge again, evenin the wake of this special issue.

First, it is entirely possible that many individualscholars who populate our discipline believe thatshareholder wealth maximization on the part ofcorporations does indeed lead to optimal social

welfare.Althoughnotall of thesescholarsare likelyto be familiar with the details of the logic(s) behindthis theorized relationship (e.g., Jensen&Meckling,1976; Jones & Felps, 2013a), the shareholder wealthmaximization objective remains appealing fora number of other reasons. First, as a single-valuedobjective, it is simple to articulate and, in theory,possible to implement (becausemultiple objectivescannot be maximized simultaneously). Second, ithas a long history of acceptance by managersand management scholars. Third, it conforms tothemandates of financial markets—that is, “WallStreet.” Fourth, social welfare issues are oftenthought to be the concern of government, not busi-ness. Fifth, in theory, it renders profit-motivatedactivity morally legitimate in utilitarian/socialwelfare terms.In addition, the single-valued shareholder

wealth maximization objective renders manage-ment theory–based research much more tractableand, therefore, more attractive to managementscholars. Theories based on economics are cer-tainly not “value free,”aswasonce claimed, but thevalues that underpin them are widely accepted,meaning that scholars employing them rarelyhave to address thorny questions involvingvalues in their theoretical and empirical work.Indeed, studies based on economics are highlyamenable to the “scientific method” that con-veys a great deal of legitimacy and prestige tomany disciplines, including management. The as-sumptions of economics may not be as realistic aswe might want them to be, but they render the re-search process much more manageable, a matterof no small concern to those of us whose careersdepend on doing management research. Finally,figuring out how to assure that social welfare isimproved in the context of management theory isvery difficult, a topic to which we now turn.

Enhancing Social Welfare in the Economy2

Social welfare is broadly defined in terms of thewell-being of a society as a whole, encompassingeconomic, social, physical, and spiritual health.Although the term social welfare is often defined

2 Some of what follows is based on a utilitarian view ofmorality. This view evaluates acts and policies on the basis ofwhether theymaximize certainkindsof consequences, usuallycouched in terms of “happiness.” Utilitarianism has beencriticized on several grounds, the most prominent of which isits apparent failure to account for justice—that is, its apparentwillingness to allow the ends to justify the means.

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more narrowly to refer to government programsthat provide assistance to needy individuals andfamilies, here our reach is longer and comportswith recent efforts to gauge social welfare morebroadly. For example, UN-sponsored rankings ofwell-being rate countries on a range of factors,including economic (e.g., GDP per capita), health(e.g., healthy life expectancy), social (e.g., socialsupport), and moral (e.g., generosity and corrup-tion) dimensions (Helliwell, Layard, & Sachs,2013). Gallup3 similarly ranks regions by well-being based on perceived social, financial,community, and physical health. Our task inthis special topic forum is filling out our un-derstanding of social welfare writ large by fo-cusing on the role of the corporate sector.

In theory, there is an array of net benefits—benefits less costs for each individual—that issocially optimal. Indeed, there is no reason thatsuch an optimum could not include concernsabout stability and justice as well as efficiency(Marti & Scherer, 2016), or even several other di-mensions of welfare (Mitchell et al., 2016). Practi-cally, however, such an optimum would beenormously difficult to achieve even in a staticworld. In a dynamic world the slightest distur-bance would require a new optimal array of netbenefits, rendering its achievement impossible inall but a theoretical sense.

If we narrow our focus to economic variablesalone, microeconomic theory (specifically, thefirst fundamental theorem of welfare econom-ics) maintains that such an optimum can beachieved when a competitive equilibrium isreached. Such an equilibrium is possible onlyunder conditions of perfect competition—for ex-ample, markets consisting of many buyers andmany sellers, competition based on price alone,markets undistorted by government policies,perfect information, undifferentiated products,and zero externalities. In equilibrium, a state ofPareto optimality obtains; that is, no one can bemade better off without making someone elseworse off. The role of the firm in this scenario,from both practical and moral perspectives,is simple: firmsshouldattempt tomaximizeprofits.From a practical perspective, profits are the mea-sure of firm efficiency and assure firm survival.Fromamoral perspective, profit-maximizing firms

play their designated role in a “rule utilitarian”moral system that assures maximal socialwelfare (Jones & Felps, 2013a). Thus, the pri-mary objective of managers is to maximize firmprofits.Unfortunately, many of the assumptions of

perfect competition—many buyers, many sell-ers, and so forth—are violated in contemporarymarket capitalism and, according to the theory ofthe second best (Lipsey & Lancaster, 1956–1957),all of the assumptions must be met for optimalityto be achieved. Importantly, moving closer toany one assumption (making it “more true”)—forexample, breaking a large firm into severalsmaller firms through antitrust action—does notnecessarily increase, andmay actually decrease,aggregate social welfare. This means that man-agement cannot simply maximize shareholderreturns and expect social welfare gains toemerge; improving social welfare has becomea much more complex and less well-understoodundertaking.From the perspective of the principal-agent

model taught to most business school students,complete contracting is assumed and share-holders are (by construction) the only residualclaimants. However, in our world of incompleteand implicit contracts, there can be multiple re-sidual claimants—that is, stakeholders (Klein,Mahoney, McGahan, & Pitelis, 2012). From thisperspective as well, because managerial de-cisions can have an impact on multiple stake-holders, improving social welfare becomes farmore complex than simply maximizing share-holder wealth.As compelling as the arguments of Marti and

Scherer (2016) and Mitchell and colleagues(2016) may be with respect to multiple di-mensions of social welfare, they further com-plicate the task of identifying improvements(let alone optima) in social welfare. Since thecomponents of social welfare writ large—forexample, efficiency, stability, and justice (Marti& Scherer, 2106)—are incommensurable (i.e.,lacking a means of making principled trade-offs), we cannot deal with multiple dimensionsof social welfare simultaneously, making a so-cial optimum a destination beyond our reach.Combined with the futility of pursuing an eco-nomic optimum—equilibrium under perfectcompetition—as discussed here, focusing onPareto improvements in aggregate economicwelfare becomes a reasonable approach, albeit

3 Available at http://info.healthways.com/hubfs/Well-Being_Index/2014_Data/Gallup-Healthways_State_of_Global_Well-Being_2014_Country_Rankings.pdf?t51449866045324.

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an incomplete one since it ignores questions ofjustice (Marti & Scherer, 2016) and intrinsicvalues (Donaldson&Walsh, 2015), among others(Mitchell et al., 2016). We can make someoneeconomically better off without making any-one else worse off. Therefore, in the analysisthat follows, incomplete though it may be, wefocus on improvements in aggregate economicoutcomes—Pareto improvements—as our stan-dard for the improvement of social welfare, aswell as on improvements in firm profitability,the driving force behind many corporate ac-tions. We will return to the issue of multiplemeasures of social welfare at a later point in thediscussion.

Pareto Improvements and Firm Profitability

As noted above, the term Pareto improvementsapplies to exchanges/relationships wherein oneor more parties are made better off without mak-ing any other party (parties) worse off. Becauseoneparty’s gain does not involve another party’sloss, there is always a net gain, resulting in un-ambiguous improvements in economic wel-fare. There are three generic ways to increasefirm profits (along with various combinationsof the three types), each with implications forsocial welfare.4 As derived from Figure 1, firmscan (1) increase economic value and pricewhile holding input costs constant, (2) reduceinput costs while holding economic value andprice constant, and (3) increase/reduce pricewhile holding economic value and input costsconstant. Under certain conditions, each ofthese profit-enhancing actions also enhances(or at least does not harm) nonshareholderstakeholders.

Figure 2 presents the components of eco-nomic cost in somewhat greater detail andmakes explicit the participation of corporatestakeholders—for example, employees, sup-pliers, creditors, neighboring communities—inaddition to customers (as recipients of consumersurpluses) and shareholders (as recipients ofproducer surplus). A reservation price is either (a)

themost that a buyer iswilling to pay for a good orservice or (b) the least that a seller is willing toaccept for a good or service. When these pricesoverlap, voluntary exchange can occur and, sincefew exchanges are made at the reservation priceof either the buyer or the seller, both parties usu-ally receive surpluses.Under category 1, firms meet the Pareto im-

provement standard if they (1) develop newproducts/services or improve or differentiateexisting products/services (thereby assuringmarket disequilibrium) without increasing costs,(2) raise prices no more than the incremen-tal economic value added, and (3) appropriate/capture no more than the incremental surpluscreated by price increases and/or increasedvolume. New wealth is created and no oneis made worse off. However, if the firm, as-sumed to have some market power under con-ditions of disequilibrium, raises prices morethan the incremental economic value created,then surpluses for continuing customers willdecline, violating the Pareto improvementstandard.In addition, Priem (2007) outlines a number

of ways that go beyond new or improvedproducts/services and that allow firms to grow the

FIGURE 1The Economics of Profit Making (from Peteraf &

Barney, 2003)

4 Note that under equilibrium conditions, firms are pricetakers; they have no power to raise or lower their prices. Sincewe are dealing exclusively with conditions of economic dis-equilibrium, firms can raise or lower their prices and willpresumably do so in accordance with the price/quantity re-lationship of the product/service in question.

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“top line.” Noting that value creation involvesthe willingness of consumers to pay more fora product/service, he describes means of increas-ing the use value of a product/service so thatthe exchange value (price) can be increased,calling this the “consumer benefit experienced(CBE)” approach.

Under category 2, with economic value andprice held constant, reductions in input coststhat result from production cost and/or trans-action cost efficiencies will result in Paretoimprovements as long as the firm does not ap-propriate more than the savings created. How-ever, assuming that it has power resulting fromdisequilibrium conditions, a firm can also in-crease its profits by reducing the prices paid toits input suppliers, resulting in wealth transfersfrom the firm’s input suppliers. No newwealth iscreated, suppliers suffer losses, and the Paretoimprovement standard is not met. Thus, thenature of input cost reductions is critical tothe link between profit seeking and wealthcreation.

Under category 3, Pareto improvements canalso be achieved by firms that can increaseprofits by reducing prices—an outcome de-pendent on the price/quantity relationship—while holding economic value and input costsconstant, thus increasing the consumer sur-plus of existing customers and adding newcustomers. However, firms with power result-ing from disequilibrium conditions may alsoattempt to increase profits by increasing prices.

Even if profits do increase, the losses incurred bycustomers result in a failure to meet the Paretoimprovement standard.Recall that we elaborate on the role of Pareto

improvements because, at the level of discreteeconomic transactions/relationships, they rep-resent the only actions that can be definitivelytied to improved social welfare. Pareto im-provements do not represent a robust and ex-haustive representation of social welfare. Theydo, however, reveal problems with the share-holder wealth maximization model and withthe use of the term wealth creation in the stra-tegic management literature, as discussed be-low. Since we are not able to identify an idealcriterion for improving social welfare, we useone that yields a particular form of betteroutcomes.

Externalities

Profitable actions taken by the firms that ei-ther (1) create positive externalities or (2) createno negative externalities also result in Paretoimprovements. In economic analyses of socialwelfare in the context of shareholder wealthmaximization, the caveat “no negative exter-nalities” is usually invoked. Negative external-ities result when losses are incurred by partiesnot involved in a given (mutually benefi-cial) transaction/relationship. The productionof untreated toxic waste as a by-product ofmanufacturing processes is an obvious exampleof a negative externality. However, if a reason-ably broad definition of stakeholder is used—one that includes those affected by corporateactions (Freeman, 1984)—the caveat involvingnegative externalities becomes redundant.Actions involving Pareto improvements will,by definition, not harm (and may benefit)those affected by the firm’s actions—that is,stakeholders.

Pareto Inferior Actions

In our analysis thus far, we have focused onPareto improvements—corporate actions that re-sult in Pareto superior outcomes. The other side ofthe coin is Pareto inferior actions—those that re-sult in losses for one or more corporate stake-holders. A short list of Pareto inferior actionsshould facilitate an understanding of what weregard as actions that, at a minimum, are not

FIGURE 2The Components of Economic Value

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unambiguously socially beneficial and, in somecases, may be socially harmful:

• employee layoffs or salary/wage cuts;• reductions in employee benefits—e.g., health

care coverage, pensions, sick leave;• allowing “normal attrition” to overburden

remaining employees;• price concessions imposed on suppliers;• non-price concessions imposed on suppliers—

e.g., delivery schedules, payment terms;• reduced customer service—e.g., lengthy

waits for poorly trained customer servicerepresentatives, reduced warranty coverage;

• product/service price increases unsupportedby cost increases;

• tax exemptions, zoning relaxation, or in-frastructure improvements extracted fromlocal communities;

• environmentally risky resource extractionpractices—e.g., BP’s operations in the Gulf ofMexico; and

• careless disposal of toxic wastes—e.g.,tannery wastes in Woburn, Massachusetts,disposal in countries without protectiveregulations.

In short, a number of common corporate ac-tions intended to increase profits certainly donot meet the Pareto improvement standard andmay not improve net social welfare. Simplyequating improvements in shareholder wealthwith social welfare improvements (wealth cre-ation), as is often done in the strategic man-agement literature (for explicit exceptions seeKlein et al., 2012, and Peteraf & Barney, 2003), isnot justifiable. Unless the profit-improving ac-tion can be shown to actually improve socialwelfare—that is, create new net wealth—noconclusion to that effect should be drawn orimplied.

Pareto Improvements and Other Elements ofSocial Welfare

While the Pareto criterion is assumed to beapplied in aworld in which economic exchangesare voluntary—if one party does not benefit, he orshe does not make the exchange—power differ-entials between exchange partners make itlikely that, even if no one loses, the gains of thepowerful will be greater, perhaps far greater,than the gains of the less powerful. Thus, re-peated applications of the Pareto criterion couldresult in increased concentrations of wealth,which re-raises the issue ofmultiplemeasures ofsocial welfare.

Marti and Scherer (2016) deal specifically withthe (distributive) justice aspect of social welfare.In terms of financial regulation, they argue,scholars and regulators put far too much empha-sis on efficiency, too little on stability, and almostnone at all on justice. In fact, a criterion based onPareto improvements could be applied to eco-nomic policy writ large; that is, efficiency (or sta-bility or justice) should not be improved at theexpense of the other two. For example, regulatorychanges intended to improve efficiency in fi-nancial markets could not be implemented ifthey resulted in less stability in financial mar-kets or an increase in the Gini coefficient,5

a measure of equality—for example, income,wealth—in the population. However, given theeconomic collapse of 2008 andongoing increasesin concentrations of wealth, we suspect thatmany citizens of Western democracies wouldsacrifice a fair amount of efficiency for improvedstability. Those in the United States wouldprobably prefermore egalitarian distributions ofwealth and income as well.

Kaldor Improvements

Situations in which profit-generating corpo-rate actions do not harm any nonshareholderstakeholders—Pareto improvements—far fromexhaust the social welfare possibilities, however.Indeed, opportunities for Pareto improvementsare likely to constitute a relatively small pro-portion of potential corporate actions. NicholasKaldor (1939) offered one means of extendingPareto improvements to include actions for whichtrade-offs between shareholders and otherstakeholders are required.6 If the benefits antici-pated by one party are great enough to allowcompensation adequate to “make whole” thosewho would be harmed, the policy in questionwould be regarded as an improvement in welfare

5 HigherGini coefficientsconnote lessequaldistributionsofwealth or income; lower coefficients connote greater equality.Among national economies, most Gini coefficients fall ina range of 0.20 to 0.50. For example, for OECD countries, overthe 2008–2009 time period, after-tax Gini coefficients rangedbetween0.25and0.48,withDenmark the lowestandMexico thehighest. For the United States, the country with the largestpopulation in OECD countries, the after-tax Gini coefficientwas 0.38 in 2008–2009.

6 Some economists believe that Kaldor’s extension of thePareto criterion should be applied only at the macro level(e.g., governmental regulations). We see no reason that itcannot be applied at the corporate policy level as well.

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and desirable under Kaldor’s criterion.7 AlthoughKaldor’s formulation involves only hypotheticalcompensation, it is sufficient to meet the stan-dards of many forms of utilitarianism—that is,those that focus solely on aggregate economicwelfare, without regard for the distribution ofharmsandbenefits.As longas the “winners’”gainsexceed the “losers’” losses, utilitarian standardsare met. Thosewhose wealth/income is dependenton shareholder returnswouldbecome richer owingto “efficient” (but uncompensated) wealth transfersfrom nonshareholder stakeholders, who would be-come progressively poorer.8

Indeed, repeated applications of the Kaldorcriterion could result in even more rapid in-creases in concentrations of wealth/income thanrepeated applications of the Pareto criterion. Un-der Pareto, there are no losers; under Kaldor, notonly are there losers but they are uncompensated.In addition, the Pareto approach has the advan-tage of being based on voluntary exchanges,while the Kaldor approach could be highly co-ercive. Although the Kaldor criterion would seemto be an improvement on the apparent current“socialwelfare” criterion (i.e., shareholderwealthcreation is wealth creation) because corporateactions resulting in reductions in net social wel-fare are not allowed, the distributive justice im-plications remain very significant. For thesereasons we do not endorse Kaldor improvementsas an alternative to Pareto improvements.

Perhaps because Kaldor was concerned onlywith hypothetical compensation, actual compen-sation of those harmed by corporate policies—that is, wealth transfers, externalities—has neverbeen seriously considered. Nor is it surprisingthat such harms do not play a role in attributionsof economic efficiency that accrue to profit-maximizing corporate behavior. However, thefact that we rarely calculate the extent of harmscaused by specific corporate policies, let alonecompensate those harmed, does not diminish theharms themselves. And because the Kaldor cri-terion is itself fraught with thorny problems boththeoretical and practical (e.g., Layard & Walters,

1978; Sidak & Spulber, 1996; Williamson, 1996), wecannot endorse a criterion such as Kaldor im-provements with compensation.9We do, however,suggest that, given the problems with otheroptions—equating shareholder wealth creationwithwealth creation/socialwelfare improvement,Pareto improvements, and Kaldor improvements—such a criterionmight represent an intriguing lineof inquiry for future exploration,10 but one that isfar too complex to examine with any thorough-ness here. To sum up, the assessment and mea-surement of social welfare and, by extension, therelationship of social welfare to managementtheory are not problems for which easy solutionsare apparent.

CONCLUSIONS AND IMPLICATIONS

Themost striking conclusion that can be drawnfrom the six excellent articles that make up thisspecial topic forum and our own examination ofthe role of socialwelfare inmanagement theory isthat assessing and measuring social welfare isa very complex and difficult undertaking. Onetheme that emerges from the included articles isthat social welfare cannot be understood in termsof economicefficiencyalone. Twoarticles (Marti&Scherer, 2016;Mitchell et al., 2016) directlyaddressthis issue, and a third (Cobb, 2016) addresses itimplicitly. Marti and Scherer (2016) and Cobb

7 What we have called the Kaldor criterion is often referredto in the economics literature as Kaldor-Hicks efficiency afterKaldor and John Hicks (1939), who added the provision thatthose potentially harmed by an action could (in theory) pay thepotential actor not to proceed with the action.

8 Some commentators (e.g., Hartman, 2006; Smith, 2012) be-lieve that this process is already well underway.

9 On its face, compensating nonshareholder stakeholdersfor wealth transferred to producer surplus (Figure 2) makes nosense. If producer surplus is used to compensate non-shareholders for their losses, there is no net gain in producersurplus. Indeed, this sort ofwealth transfer is a zero-sumgame;that is, producer surplus increases (approximately) equal(nonshareholder) stakeholder surplus decreases. It appearsthat no new wealth is created. However, when producer sur-plus (profit) is translated into shareholder wealth, this is nolonger true. Because price/earnings (P/E) ratios for corporateshares are almost universally greater than 1 to 1 (among S&P500 firms, P/E ratios averaged from 13.01 to 16.66 in the periodfrom September 2011 through December 2012 [ycharts.com,2013]), shareholder wealth gains—share price increases—arelikely to be greater than stakeholder losses, leaving resourcesavailable to compensate harmed stakeholders. Importantly,compensationmust be paid in company stock. An unpublishedworking paper authored by two of the special issue editors ofthis special topic forum, entitled “Sustainable Wealth Crea-tion” (Jones & Freeman, 2013), begins an exploration of thispossibility.

10 To paraphrase Williamson (1996: 1014), to argue that anapproach is flawed does not establish that there is a superiorfeasible alternative. All feasible options may be flawed,and choices must be made from the feasible alternatives(Williamson, 1996).

2016 225Jones, Donaldson, Freeman, Harrison, Leana, Mahoney, and Pearce

(2016) focus on issues of distributive justice, whileMitchell et al. (2016) make it clear that there aremultiple values worth preserving. Unfortunately,assessing social welfare in terms of multiple in-commensurable measures is well beyond ourcurrent capabilities. As a result, we focused oneconomic welfare first and took distributive jus-tice into account after the fact.

In terms of economic welfare—that is, wealthcreation—alone, we examined three possibleapproaches to improving social welfare andspeculated on a fourth. First, we concludedthat the current practice of equating share-holderwealth improvement with social welfareimprovement—explicitly or implicitly—shouldbe abandoned in both management theory andmanagement practice. The assumptions onwhich the model that supports this conclusionis based bear no resemblance to the realitiesof twenty-first-century market capitalism. Fur-thermore, many actions taken by corporatemanagers to improve company profits harm non-shareholder stakeholders of the firm. Thelosses must simply be absorbed by these stake-holders. Indeed, they are rarely, if ever, mea-sured or counted in calculations of economicefficiency. For this reason it is likely that some ofthese actions do not result in net improvements insocial welfare, and some may actually result insocial welfare losses. Furthermore, in manycases, because shareholders gain at the expenseof other stakeholders, distributions of incomesand wealth become increasingly unequal, a dis-tributive justice concern. Finally, actions takenunder the banner of shareholder wealth im-provement are fundamentally coercive; that is,the losses of nonshareholders are not voluntarilyaccepted.

The one approach that yields unambiguous im-provement in socialwelfare, at leastwith respect tothe discrete action under consideration, is the Par-eto improvement criterion. Making someone betteroff without making anyone else worse off does im-prove social welfare. However, corporate actionsfor which there are winners but no losers make upa relatively small proportion of all such actions,meaning that the Pareto criterion cannot bewidelyapplied. Furthermore, although voluntary eco-nomic exchanges, by definition, improve the wel-fare of both parties, differences in bargainingpower may mean that repeated Pareto improvingexchanges lead to increasingly unequal distribu-tions of income and wealth. Nonetheless, no

coercion is involved in the voluntary exchangesthat underpin Pareto improvements.Employment of the Kaldor improvement crite-

rion holds the possibility of obtaining actual so-cial welfare improvements for a full range ofcorporate decisions. If winners could (hypotheti-cally) compensate losers for their losses and stillregister gains, social welfare would be improved.The hypothetical nature of this criterion is a keyelement here. As long as no actual compensationis involved and the gains of the winners exceedthe losses of the losers, the Kaldor criterion issatisfied. And although greater economic effi-ciency is achieved, distributions of income andwealth are likely to become substantially moreunequal. In addition to this distributive justiceconcern, Kaldor improvements clearly involvecoercion; losers do not accept their lossesvoluntarily.An approach that we represented as an “in-

triguing line of inquiry for future exploration”might be called Kaldor improvements with com-pensation. Because this approach is laden withthorny theoretical and practical problems, a fullexploration of the prospects for this criterionwould involve an analysis well beyond the scopeof this article. However, other scholars might givethis possibility further consideration, particularlyin view of the fact that shareholder wealth gainsare measured in share price increases, whichgrow in proportion to the P/E ratio of the firm’sstock (usually 10-1 or more) rather than in directproportion to stakeholder losses. If this relation-ship holds, ample resources could be madeavailable to compensate (in company stock) thoseharmed by actions taken to increase shareholderwealth.We note that two of the articles included in this

special topic forum appear to be based on Paretoimprovements, the one social welfare criterionthat can be unambiguously linked to social wel-fare improvement. Bridoux and Stoelhorst (2016)show that communal sharing firm/stakeholderrelationships are more efficient than other re-lational modes. Since no other stakeholders ap-pear to be harmed, the Pareto criterion ismet. Thesame conclusion can be reached with respect tothe Bosse and Phillips (2016) article. Introducingnotions of fairness and reciprocity into the con-tracting process involving the firm’s board and itstop executives could result in reduced agencylosses and possible agency benefits in corporategovernance. No stakeholder group appears to be

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harmed in this revised process, againmeeting thePareto improvement criterion.

In terms of the implications of this special topicforum in general, and of this introduction in par-ticular, we offer the following. With respect tomanagement scholarship, Marti and Scherer(2016) remind us that our theories not only de-scribe social reality but also shape it. With thiscaveat in mind, we strongly urge managementscholars to take social welfare considerationsinto account in their theorizing and empirical re-search. This consideration could take the form ofa thoughtful assessment of the social welfareimplications of their work; relying on the as-sumption that increasing shareholder wealth in-variably leads to social welfare advances canno longer be justified. The same recommenda-tion applies to practicing managers as well;Friedman’s (1970: 124) claim that “the social re-sponsibility of business is to increase its profits”cannot be taken as gospel any longer. In addition,we hope that management scholars will be in-spired to directly address social welfare concernsin their theory building and empirical studies. Ifthey do, we need not experience another “eeriesilence” with regard to social welfare issues inmanagement research once the dust settles onthis special topic forum. And if theories do shapesocial reality, as we believe they do, the “betterworld” envisioned by the Academy of Manage-ment may begin to take shape.

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Thomas M. Jones (rebozo@uw.edu) retired as the Boeing Professor of Business Manage-ment at theUniversity ofWashington’s Foster School of Business. He receivedhis Ph.D. inthe political, social, and legal environment of business from the University of California,Berkeley. His research interests include stakeholder theory, normative theories of thefirm, and the intersection of business ethics and corporate strategy.

Thomas Donaldson (donaldst@wharton.upenn.edu) is theMark. O.Winkelman Professorin the Wharton School at the University of Pennsylvania. He also holds a secondary ap-pointment in the Department of Philosophy, University of Pennsylvania. He received hisPh.D. in philosophy from the University of Kansas. He studies corporate governance andbusiness ethics.

R. Edward Freeman (freemane@darden.virginia.edu) is a University Professor and theOlsson Professor of Business Administration at the DardenSchool, University of Virginia.He received his Ph.D. from Washington University. His research interests includestakeholder theory and business ethics.

Jeffrey S. Harrison (harrison@richmond.edu) is a University Distinguished Educator andthe W. David Robbins Chair in Strategic Management at the University of Richmond. Hereceived his Ph.D. in strategic management from the University of Utah. His researchfocuses on stakeholder theory, corporate strategy, collaborative strategy, and mergersand acquisitions.

Carrie R. Leana (leana@katz.pitt.edu) is the George H. Love Professor of Organizationsand Management at the University of Pittsburgh, where she holds appointments in theGraduate School of Business, the School of Medicine, and the School of Public and In-ternational Affairs. She received her Ph.D. in organizational behavior from theUniversityof Houston. Her current research examines the effects of financial deprivation on workeropportunity and performance.

Joseph T. Mahoney (josephm@illinois.edu) is the Caterpillar Chair of Business in theCollege of Business at the University of Illinois at Urbana-Champaign. He earned hisPh.D. in business economics from theWharton School at theUniversity of Pennsylvania.His research focuses on the economic foundations of strategy.

Jone L. Pearce (jlpearce@uci.edu) is Dean’s Professor of Organization and Managementat the Paul Merage School of Business, University of California, Irvine. She received herPh.D. from Yale University. She studies the effects of interpersonal processes, govern-mental, and organizational control systems on organizational behavior.

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