Business ethics and the theory of the firm

The contractual or nexus of contracts theory df the firm, which is widely accepted in financial economics and legal theory, has a normative structure that can provide a framework for identifying and analyzing many business ethics problems and for devising solutions to those problems. Specifically, the contractual theory of the firm focuses on the need to safeguard the assets that each constituency brings the nexus of contracts, and many ethical problems result from inadequate safeguarding of the assets of a particular constituency. Business ethics problems can be identified within the contractual framework as wrongful harms, misallocations, and misappropriations. Solutions include tort remedies, the expansion of management responsibility, and political action, including regulation. However, the theory of the firm does not address all business ethics problems, particularly those involving large economic and social forces outside the firm. Nevertheless, the contractual theory has sufficient explanatory power that it should be seriously considered by researchers in business ethics.