3rd Place – The Invisible Ring and the Invisible Contract: Corporate Social Contract as the Normative Basis of Corporate Environmental Responsibility

In Book I of the Republic, Plato proposes one of the most troubling and puzzling ethical questions in Western philosophical tradition through the “Ring of Gyges” parable: should a person be moral even if he can do whatever he wants with impunity?[1] The same ethical dilemma is relevant today in the multinational corporations’ decision-making. In the past decades, multinational corporations like Texaco have established operations in many developing countries with weak environmental regulations. This regulatory vacuum essentially creates a “Ring of Gyges” for multinational corporations to maximize their profits through environmentally destructive operations with impunity. One of the most heated controversies in this field, Texaco’s (now acquired by Chevron Corporation) environmentally irresponsible operation in the Agua Agrio region renders a suitable candidate for the analysis of this “Ring of Gyges” dilemma in business ethics. This paper seeks to apply the methodology of social contract theory to formulate an ethical criticism against Texaco’s behaviors and provide a universally applicable normative basis for environmental protection in corporate decision-making.

The second section of the paper examines the case study of Texaco’s unethical behaviors in Ecuador and presents the crucial philosophical question whether multinational corporations are morally obligated to protect the environment in their host countries even if the environmental regulation in those nations is underdeveloped. The paper will examine various theories that attempt to provide a normative basis to corporate social responsibility and refute them as insufficient in providing a universally applicable ethical standard.

The third section of the paper will dedicate to examining the corporate social contract constructed by Thomas Donaldson and various other scholars. In this section, the paper will first define the parties of the contract as corporations and civil society. Then the reciprocal obligations of the two parties will be examined. In order to analyze corporations’ obligations to civil society, the paper will apply the social contract methodology again to provide a normative justification of corporations’ existence, namely, a set of reasons why civil society authorizes corporations to be created as productive organizations. Hence, the paper will treat these reasons as corporations’ moral obligations to civil society.

This paper argues that corporations have a moral and contractual obligation to minimize environmental pollution. Since Texaco has polluted the environment and severely harmed the overall welfare of people in Lago Agrio region, the multinational corporation has violated the abstract, implicit, but binding contract between corporations and society. A potential refutation will be presented at the last section of the essay concerning the moral status of corporations. The paper will attempt to respond to this criticism and end with limitations of the core argument presented in the paper.

Case Study of Chevron’s Environmentally Unethical Operations in Ecuador

The Economic and Political Contexts in which Texaco Operated        

This section introduces the economic and political context in which Texaco operated. After crude oil reserves were discovered in 1967 in the Amazonian region in Ecuador, multinational oil companies entered this oil rush that initially brought prospect of economic prosperity to Ecuador. In the 1960s and 1970s, oil became Ecuador’s centerpiece for modernization.[2] However, after the first few years of construction and extraction of Amazon crude, a fear emerged and began to spread in the Ecuador that existing oil reserves might be exhausted in the near future.[3] Since oil extraction is a capital-intensive and technology-driven industry and Ecuador’s own national corporations had only limited capacity to develop reserves on their own, the nation needed multinational corporations like Texaco to find and develop new reserves.[4]

Thus, the Ecuadorian state increasingly relied on the support from foreign multinational oil companies such as Texaco to finance costly exploration and production and to implement new technology.[5] This financial and technological dependency, coupled with the importance of oil revenues and investment to the Ecuadorian economy, gave Texaco enormous bargaining power in its relations with the Ecuadorian state.[6] [7] Consequently, Texaco served not only as a private operator in the energy industry in Ecuador, but also as a crucial policy advisor and to some extent, a mentor to the Ecuadorian environmental regulatory agency. Taking this advantage, Texaco continued to pressure the Ecuadorian state to formulate laws and contracts to accommodate their interests.[8]

Environmental Policy in Ecuador during Texaco’s Operations

Before Texaco first entered the Ecuadorian market and established its extraction site in Lago Agrio, Ecuador had been a “banana republic” in the most literal sense: the main pillar of its economy was agriculture, which chiefly replied on the production and export of bananas, coffee, cocoa, and sugar.[9] Therefore, the nation had almost no tradition or awareness of environmental protection when oil-intensive industrialization began in the 1960s and 1970s. The general public was further distracted from environmental awareness by the fear of not being able to discover new oil reserves and thereby losing the momentum of economic growth.[10]

Due to this lack of experience and Texaco’s political influence, the Ecuadorian state placed trust on Texaco not only to operate in the Amazonian regions, but also to serve as an advisor to the government on formulating environmental regulations. Texaco’s role as the advisor to oil policy-making is further confirmed by a series of testimonies by government and corporate officials from the Ecuadorian state and Texaco. According to General René Vargas Pazzos, who was a key policymaker when the oil rush began, the government did not question Texaco about environmental standards because government regulators were not aware of the potential damages of the company’s operations.[11]

Thus, taking advantage of its special role, Texaco set its own environmental standards, and policed itself.[12] Although Ecuador had broadly-defined environmental laws and Texaco’s contract with the state reflected those regulations, there was little enforcement (Decreto Supremo, 1973; Ley de Aguas [Law of Waters], Decreto Supremo No. 369).[13] Therefore, as foreign oil companies entered the Ecuadorian market, the state was “being redefined such that it increasingly assumed the role of an administrative and calculating organ that facilitated the workings of transnational capitalism”.[14] This regulatory vacuum was Texaco’s “Ring of Gyges,” with which the oil multinational operated with impunity in its pursuit of profits, a pursuit that has cost lives of indigenous peoples and caused destruction of the ecological system in the Lago Agrio region.

Texaco’s Environmentally Irresponsible Operations and their Effects

According to official data, during its tenure as operator, Texaco drilled 339 wells and built 18 central production stations. Its operations covered more than a million acres in Ecuador’s northern Amazon, primarily in the provinces of Orellana and Sucumbíos”.[15] Taking advantage of the weak environmental regulation in Ecuador, Texaco deliberately dumped enormous amount of toxic drilling and maintenance wastes and an estimated 19.3 billion gallons of oil field brine into the water system of Lago Agrio without treatment or monitoring.[16]

Among other toxic wastes, the chief source of pollution was Texaco’s emission of oil field brine, which is also known as produced water. Produced water refers to the combination of two types of liquids: 1) the formation water (a layer of natural water) that lies under the hydrocarbons in oil and gas reservoirs; 2) the water injected into the ground to force the oil to the surface.[17] Produced water may also contain benzene and polycyclic aromatic hydrocarbons (PAHs), heavy metals, and levels of salts that are toxic to plant and animal life.[18]

The high salt content also makes it difficult to treat produced water on earth surface to significantly reduce or eliminate toxicity.[19] Hence, due to the acute toxicity and chronic environmental effect of produced water, U.S. regulatory agencies require companies to re-inject it back underground after the extraction operation. The discharge of produced water and other wastes into fresh waters has been generally prohibited by federal law since 1979 (Clean Water Act, United States Environmental Protection Agency).[20]

In spite of Texaco’s knowledge of the toxicity of produced water and its promise to the Ecuadorian state to use the best technology to avoid contamination, the company discharged almost all of the produced water into the environment via unlined, open waste ponds known as production pits.[21] Indigenous peoples experienced an increase in cancer rates (including cancer in mouth, stomach, and uterine) and the court-appointed expert estimated that Texaco’s operations have caused at least 1,400 cancer cases.[22] In addition to the harmful effect on human health, Texaco’s operations also severely disturbed the local ecological system, killing several types of fish that used to inhabit rivers and streams in the Lago Agrio region. This ecological disturbance in turn destroyed the economic mode of living of the indigenous peoples who had depended on fishing for food and trade.[23]

The “Ring of Gyges” Dilemma for Texaco

In the vacuum of strong environmental regulation, Texaco could have chosen a more environmentally responsible extraction strategy, with impaired economic profit but simultaneously less environmental harm to the Amazonian indigenous peoples and the surrounding ecological system. But was Texaco morally obligated to do so? Some advocates of CSR (Corporate Social Responsibility) would argue that corporations are morally bound to take into account environmental factors in their decision-making because CSR will bring them both good reputation and profits. One prevailing argument in this school of thought is articulated by Benjamin Heineman, the former General Consul of General Electric. Heineman combines “doing good” and “doing well” by arguing that high integrity in a corporation will bring high performance to the corporation in the long run, if not immediately.[24] Essentially Heineman’s justification of CSR is based on a “prudential” basis, namely, the idea that a corporation should do good because doing so will help with the corporation’s performance at least in the long run.[25]

This view, however, does not provide a strictly normative reason why corporations should protect the environment. In other words, if we apply Heineman’s argument to the case of Texaco in Ecuador, his argument seems to be incapable of persuading the corporation to protect the environment in the first place. As we have demonstrated before, Texaco tried to save costs and maximize profits by discharging produced water into rivers without any treatment. Clearly, the company’s low integrity has brought enormous profits—high performance—in the short run. Now according to Heineman’s argument, in the long run Texaco’s illicit practices would jeopardize its performance. Nonetheless, Texaco can—and did—use its political influence in the Ecuadorian politics to avoid the disclosure of its scheme and thus evaded punishment during its tenure as operator. Furthermore, the company may not care about long-term results. In developing countries like Ecuador where coup d’états have happened quite often, it is reasonable for multinational corporations to plan on reaping short-term benefits and leaving the country before the next political upheaval takes place. Therefore, lacking universal and normative binding power, Heineman’s argument may not be sufficient to either morally criticize Texaco’s actions or persuade corporations to make environmentally responsible decisions.

On the other end of the spectrum is Milton Friedman’s doctrine of free market, which states that a corporation’s only social responsibility is to “use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.[26] According to Friedman, CSR in the traditional sense shows “a fundamental misconception of the character and nature of a free economy”.[27] In Friedman’s perspective, CSR restricts people’s economic freedom, which is essential to political freedom. If corporations take on any social responsibility other than profit maximization within the rules of the game, the corporations are imposing a tax on their owners and in turn using this tax to provide for public goods. This creates a situation similar to “taxation without representation” and betrays the spirit of checks and balances of the American political system. Essentially, the fact that corporate agents use their principles’ (the owners’) resources to provide for public good jeopardizes the foundation of the freedom and liberty of Western society because CSR in ordinary sense is imposing political mechanism—rather than market mechanism—to the allocation of scarce resources in the economic system.[28] Hence, corporate leaders who incorporate CSR in decision-making might lead Western society toward socialism.

However, the free market model that Friedman advocates might fail to provide a normative standard to resolve the “Ring of Gyges” dilemma (the conflict between morality and self-interest). As Kaptein and Wempe argue, if society does not impose any moral obligation on corporations other than profit maximization, the free market model could not help corporate leaders find a socially desired optimum because of its various imperfections.[29] For example, in a perfectly competitive market, the participants’ inclination to ignore negative externalities and to pass the costs to the community is partially the cause of the environmental pollution in Ecuador.[30] Therefore, Friedman’s free market model may fail to provide a normative basis to resolve the ethical question in Texaco’s case.

The Corporate Social Contract: the Invisible Contract that Binds

Among the theories that attempt to establish a normative basis for corporate social responsibility, the corporate social contract proposed by Thomas Donaldson and a few other scholars appears to be especially relevant in addressing the “Ring of Gyges” dilemma in Texaco’s case. In political philosophy, the social contract is used to justify the creation of civil government by individuals in the state of nature. Though this contract has binding moral power, it is not a physical contract; rather, it is a thought experiment designed to explain the reciprocal rights and obligations between the people and the civil state.[31] Borrowing the concept and methodology from the political social contract, scholars of corporate social contract endeavor to create a normative theory that requires corporations to fulfill a set of duties to civil society, among which environmental protection stands out as one of the chief corporate moral obligations. With this powerful analytical tool in hand, this paper seeks to raise a normative criticism against Texaco’s operations through constructing a corporate social contract between Texaco and the individuals who have been affected by the firm’s actions. Before we delve into the corporate social contract, it is helpful to first examine its origin—the political social contract in historical perspective.

Intellectual History of the Political Social Contract

Ever since its debut in the early Enlightenment era, the political social contract has evolved and generated many variations in the course of Western philosophical tradition. The idea of the political social contract was first proposed by Thomas Hobbes (1588-1679), and later developed by classical theorists such as John Locke (1632-1704) and Jean-Jacques Rousseau (1712-1778). Instead of attempting to empirically trace the historical root of the emergence of government, political philosophers construct the social contract model to normatively justify the existence of the civil state and to provide a moral foundation for politics. Due to the space constraint of this essay, only three principal philosophers’ thoughts will be introduced here as the inspiration of the corporate social contract.

Hobbes begins his argument from what he calls “a state of nature,” namely, a world without—and hypothetically prior to—any political institution such as the civil state.[32] In the Hobbesian state of nature, a human being is rational and self-interested.[33] Thus, Hobbes concludes that the essence of the state of nature is a state of war, namely, continuous struggles among individual human beings to preserve his own interests.[34] Consequently, no moral standard is valid and nothing can be unjust in this everlasting struggle of survival.[35] According to Hobbes, in order to bring peace and security, individuals must give up some of their natural rights and enter a contract with each other. The civil state—the result of this social contract—is governed by the sovereign, who enters a second social contract with citizens. In the second contract, citizens must obey the benevolent, monarchical sovereign in exchange for protection and peace.

John Locke inherited the methodology of the political social contract from Hobbes. However, different the Hobbesian state of war, the Lockean state of nature is not as violent and unpredictable as the state of war. The Lockean state is governed by a law of nature obliging individuals not to “harm another in his life, health, liberty, or possessions”.[36] But in this primitive state there is no common law-enforcing authority to make sure the law of nature is executed. Hence a social contract arises to accommodate this social demand for law and order. In entering this contract each individual must give up his or her own power to judge offences so as to empower a commonwealth with legislative, judicial, and executive powers.[37]

Jean-Jacques Rousseau has a different conception of the social contract than that of either Hobbes or Locke. According to Rousseau, the social contract arises when every individual gives up all his rights to form a common authority called the “general will”.[38] Thus, “in giving himself to all, each person gives himself to no one”.[39] This way, argues Donaldson, Rousseau achieves his special aim to align the interest of the state with the desires and well being of the people of that state.[40]

Methodology of Constructing the Corporate Social Contract

Having explored the philosophical origin of the corporate social contract, we now introduce the methodology of constructing this contract between Texaco and civil society. First we need to consider possible contractual models we can use for our purpose. As summarized by Kaptein and Wempe, two approaches of constructing the social contract have been used in political philosophy.[41] The first approach to the political social contract is to directly analyze the contract between government and citizens without examining the creation of the civil state (in other words, assuming the existence of the government). In this contract, government and citizens are the two parties bound by the contract with reciprocal rights and obligations. For example, in Locke’s writings, he lists “the preservation of property” of the citizens as primary obligation of the civil government to the people.[42]

Secondly, some philosophers conceive the emergence of the civil sate as the result of the social contract formed among individual human beings in the state of nature (hypothetically prior to the establishment of civil government).[43] [44] In this state, lacking security of life and property, people decide to give up some of their natural rights to empower a common authority to enforce order. In other words, the common authority, namely, the civil state, is the equilibrium outcome of the non-cooperative and independent bargaining among individual human beings. In this approach, individual human beings are the parties of the social contract and the establishment of the government is the crystallization of this implicit contract.

In order to morally evaluate Texaco’s operations, we need to start from the first contractual model, namely, the social contract between corporations and civil society. We first need to clarify society’s obligations to corporations as productive organizations. These obligations comprise of recognition by the law as single legal person and the right to utilize natural resources and hire employees. On the other hand, corporations’ obligations to civil society are often very ambiguous and are the heated battlefront for CSR scholars. Here we make use of the second contractual model to construct a micro social contract that justifies the existence of the corporation as a productive organization. Intuitively, rational and self-interested individuals will only enter a contract if the benefits of doing so outweigh the costs. Hence, individuals in civil society will demand the maximization of a set of benefits and the minimization of costs as the primary conditions for them to enter the micro social contract and to authorize the existence of a corporation as a productive organization. These two goals—maximizing benefits (such as efficiency) and minimizing costs (such as pollution)—comprise of a corporation’s moral obligations to civil society. Finally, we apply the complete corporate social contract to between corporations and civil society to ethically evaluate the Texaco’s actions in Lago Agrio and argue that the multinational should be morally criticized because it has violated four clauses in the abstract, invisible contract.

The Parties of the Corporate Social Contract

Before we specify terms of the corporate social contract, it is crucial to delimit the parties of this contract. We use the term “civil society” to describe one party of the contract in previous sections. Civil society may carry different connotations: it could refer to Rousseau’s superhuman “general will” or to every individual in society. For the purpose of this paper, we use the latter as the definition of civil society.[45]

Then we need to define what we mean by the term “corporation.” As Donaldson points out, the more precise definition in the discussion of corporate social responsibility conceives the corporation as “productive organization, one where people cooperate to produce at least one specific product or service”.[46] In Texaco’s case, the company is conceived as a productive organization that produces multiple goods and services, one of which is the extraction crude oil from the Lago Agrio region. 

Civil Society’s Obligations to Texaco as a Productive Organization

Now that we have clarified the parties of the corporate social contract, we can proceed to specify terms of the contract. The contract follows the basic form “if civil society agrees to do X, then the corporation agrees to do Y”.[47]

As Donaldson claims, society has two chief obligations to corporations: 1) society authorizes corporations to hire employees and use natural resources; 2) society provides the legal framework in which corporation can exist and operate as a single agent.[48] While the first obligation may seem prima facie, society’s second obligation to corporations needs more justification and elaboration.

Texaco as a productive organization can only exist and function because society provides the legal framework for it to do so. As Chief Justice Marshall argues, “a corporation is an artificial being, invisible, intangible, and existing only in the contemplation of law. Being the mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence”.[49] According to Marshall, the law authorizes corporations to exist as legal persons with many of the rights and obligations that natural persons possess under the law. Like the political institutions in Hobbes’ Leviathan, corporations are created in the image of their creators, namely, natural persons: companies must pay taxes, can sign legal contracts, etc.[50]

Some people may object to this view by citing the freedom of assembly and association guaranteed by the Bill of Rights.[51] In their perspective, corporations are not created by public act, but are merely natural products of people’s exercising their right of association.[52] [53] These critics are right about the fact that social organizations in general are concrete expression of people’s freedom of assembly and association. However, as clarified in the previous section, corporations are not merely organizations; instead, they are productive organizations that produce goods and services. In order to fulfill its mission of producing these goods and services, a corporation needs to be recognized by the law as a single agent to sign contract and to possess the right to be protected by the law in tort cases.[54] Therefore, it is legitimate to assert that corporations owe their legal existence to civil society. Together with material support (natural resources), the legal justification of corporations’ existence is what society provides as one party in the corporate social contract. 

Texaco’s Obligations to Civil Society

Although it is not difficult to define society’s obligations to Texaco, the company’s duties to society are relatively ambiguous and have been the focus of debate in CSR. Many arguments to support corporate obligations to society resemble subjective, personal value judgments rather than universally applicable standards. A potential route to provide a normative basis for corporations’ social obligations is through the second contractual model we mentioned before. This model first imagines a state without a certain institution and then justifies its existence by examining the benefits and costs of establishing it. To be more concrete, this model hypothesizes a society with neither the collective mode of production nor any productive organizations. Donaldson calls this state “a state of individual production,” in which people produce goods and services alone. In this state, there would be no banks, no post offices, no multinational corporations such as Texaco, etc.[55] We then use the net benefits that the introduction of a productive organization will bring to individual producers to justify the creation of corporations. Analogous to the political social contract here, we hence use reasons that justify the existence of corporations as the normative basis for corporations’ obligations to civil society.

An Instrumental Device: the Micro Social Contract to Justify Corporation’s Existence

In the state of individual production analogous to the “state of nature,” individuals are rational and self-interested, but not as violent as depicted by Hobbes, nor as primitive and pure as depicted by Rousseau. Given the existence of the civil state to ensure the preservation of one’s own life and property under the law, an individual pursues a purely economic interest. These economically driven individuals, as Donaldson portrays, “have not yet organized themselves, or been organized, into productive organizations”.[56]

Presumably, rational and self-interested individuals will only enter an economic contract when the marginal benefits from creating productive organizations outweigh the costs of creating them.[57] We then need to analyze and compare the specific benefits and costs that the introduction of productive organizations will bring to individual producers. Generally speaking, on one hand, the emergence of corporations will bring about economies of scale and lower production and technology costs. On the other hand, when individual producers form productive organizations, they have to sacrifice the independence and control they enjoy in the state of individual production and follow the command of the conscious central organizer of the corporation, namely, the manager.[58]

In order to conduct the cost-benefit analyses in more detail, it is crucial to divide people in the state of individual production into two groups. The first group is the consumer, who, according to Donaldson, is “economically interested” in the emergence of corporations.[59] This broad definition of consumer includes not only the people who purchase goods manufactured by corporations, but also those who are affected by the production process in an indirect manner (the community whose environment deteriorates due to industrial waste). Thus, the indigenous peoples whose living environment was disturbed by Texaco’s intrusion belong to this category. The second category is the employee, which refers to anyone who works in corporations. It is important to note that these two categories are not mutually exclusive.

Benefits and Costs on Consumers

Consumers will choose to establish productive organizations when the benefits of doing so outweigh the costs. In other words, economically driven, rational individuals will hope to enhance their economic interests through entering this social contract. Based on Donaldson’s reasoning, these benefits could include: improving efficiency through division of labor, economies of scale, and enhanced decision-making mechanism; stabilizing level of output and system of distribution.[60]

The first advantage of establishing a productive organization like Texaco is enhancing efficiency through specialization and economies of scale. As the size of the firm becomes larger, a specialized cooperative system in which each worker is in charge of one aspect of production is more efficient than the system in which one worker is in charge of all aspects of production and produces alone.[61] In Texaco’s case, the division of labor within the oil multinational enables each worker to concentrate on one specific aspect of production. This way, an average worker will sharpen his skill in certain aspect and make fewer mistakes in production, thereby lowering the cost of production. The drop in cost of production will in turn cause a decrease in price for consumers.

A second, related advantage of productive organizations is the enhanced decision-making mechanism. A corporation like Texaco typically has decision-making mechanisms such as the board of directors, thereby reducing the risk of making unsound decisions. In addition, corporations tend to have superhuman longevity as well as superhuman institutional memory.[62] Thus, a corporation like Texaco can avoid making the same mistakes by referring to memos in its database. The enhanced decision-making mechanism will ultimately benefit the consumers because they will enjoy goods of better quality and experience fewer industrial disasters caused by mistakes of the corporate leadership.

In addition to enhancing efficiency, the introduction of productive organization will also improve consumer welfare with stabilized level of output and channels of distribution. For example, when Texaco came in Ecuador in the 1960s, the first project they conducted was not oil extraction, but the establishment of infrastructure such as roads and pipelines to transport crude oil to the Pacific coast of Ecuador.[63] The construction of pipelines as well as extraction sites made possible the stable extraction and export of crude oil, which was distributed efficiently through the transportation network built by Texaco. This level of efficiency and stability could not have been achieved had Texaco—a multinational productive organization—not established a presence in Ecuador.

Having discussed the consumer benefits, we also need to consider the costs of establishing a productive organization like Texaco on its consumers. Increase in scale of production and centralization of factors of production lead to larger amount of pollution.[64] Though consumers may enjoy the benefits of establishing a productive organization in their community, they must be acutely aware of the potential environmental consequences that this sharp increase in scale and amount of production could cause. In the state of individual production, though individual producers may still cause pollution, but since they lack the technology and resources to build a complicated discharging system as that built by Texaco, the environmental externality caused by individual production is rather insignificant compared to that caused by the oil multinational.

The centralization of factors of production in a productive organization also creates a higher risk of abuse of the political power that the corporation possesses as a socio-economic Leviathan.[65] Corporations such as Texaco typically possess enormous political influence resulting from their economic power. As the authors of the Federalist Papers comment, men are not angels.[66] If there is a risk of abuse of government power, then it is reasonable to expect a similar risk of abuse of corporate political power because in many aspects gigantic corporations are similar to the political institutions described in the Leviathan (enormous control over the market, ability to lobby and influence policy-making, etc.).

Benefits and Costs on Employees

Establishing productive organizations also generates benefits to the employees such as increasing income potential and securing fixed income regardless of the fluctuation of the market.[67] Firstly, as discussed before, in a corporation such as Texaco, workers form a specialized and cooperative system in productive organizations and thus they can produce more than if they work independently. This increase in production normally leads to higher revenues for corporations as well as higher income for workers. In addition, in productive organizations employees typically receive fixed income. For example, even if the global oil market is at the nadir of the business cycle, as long as Texaco continues to exist, its workers possess the right to ask for regular wages from the corporation. This can hardly be true in the state of individual production because in that state an individual’s income fluctuates according to his or her rate of production and sales. In other words, productive organizations provide a shelter for employees during economic recessions.

While the introduction of productive organizations can bring benefits to employees, it can also incur costs. One potential cost would be the lack of worker control over working conditions. In the state of individual production, a worker can choose the working environment that suits him the best. However, in productive organizations, the central planner—the corporate manager—has the final say over the working conditions. Sometimes, in order to maximize marginal profit, managers would put employees in extremely unhealthy and even dangerous conditions to keep the cost of production low.

Completing the Contract: Specifying Corporate Obligations to Society

The cost-benefit analyses in the previous two sections indicate the advantages and costs that citizens (consumers and employees) must take into account when they decide whether or not to enter a social contract that requires them to leave the state of individual production for the establishment of productive organizations such as Texaco. These advantages and costs are the reasons why individuals might want to create corporations. Only when benefits outweigh the harms will individuals choose to change status quo (individual production) and organize themselves as corporations. Hence, when rational and self-interested individuals authorize the existence of a productive organization like Texaco, they expect the company to maximize the benefits and minimize harms aforementioned. Analogous to the political social contract, the reason why people allow the company to exist are the moral obligations that civil society imposes on the corporation as a productive organization.[68] The social contract between corporations and civil society not only provides a normative criticism against Texaco’s environmentally irresponsible actions, but also serves as a measure to morally evaluate the performance of corporations as productive organizations. If a corporation lowers economic efficiency, accepts political favoritism, or intentionally emits pollution, it has violated its implicit, invisible contract with society. The company must fix its wrongs, or negate the moral foundation of its existence.[69]

Texaco’s Violations of the Invisible Social Contract

Now that we have completed the corporate social contract between corporations as productive organizations and civil society, we can use this powerful analytical tool to tackle the “Ring of Gyges” ethical dilemma involved in Texaco’s case. If the company’s actions fail to maximize welfare or cause harms for individuals who are economically and socially affected by these actions, then the corporate social contract dictates that Texaco has violated its obligations to civil society and thus is morally reprehensible. Among the company’s other abuses, this paper will focus on Texaco’s two main violations in its operations in Lago Agrio region: environmental pollution and abuse of political power.

As mentioned in the first section of this essay, Texaco has not only polluted the water system in the Amazonian forest, but also perpetuated the pollution process by leaving a set of pipelines in the extraction site they sold to Ecuadorian companies to channel produced water into lakes and rivers.[70] Consequently, when scientists surveyed samples from drinking, bathing, and fishing water in Lago Agrio, the toxicity was 10 to 1,000 times greater than the level permitted by the U.S. Environmental Agency domestically.[71] As we discussed in the first section, scientific evidence suggests a strong correlation between the toxic produced water and the increase in cancer and death rates among the indigenous peoples. Texaco’s defenders could potentially argue that environmental harm is a necessary evil for economic progress, and as long as the company fulfills the obligation of improving the economic efficiency and income level in Lago Agrio region, the oil multinational’s moral blame should be alleviated. This argument is invalid for three reasons. First, provided that there had been significant increase in personal income level for the indigenous peoples, why would they want the extra pesos if they would die from cancer at any time from drinking contaminated water? Second, if other regions in Ecuador prospered from the revenues generated by the oil business, this constitutes an act of organizational violence against the indigenous peoples because the nation is essentially sacrificing lives of the indigenous minorities for economic interest. Third, the economic and social welfare in Ecuador did not improve significantly either on a national level or in the Lago Agrio region. Nationally, Ecuador has the highest per capita debt (around $1100 per person) in South America; during the oil rush from 1970 to 1990, national unemployment rate has not improved while the percentage of citizens in poverty doubled from 47 percent to 70 percent. Locally, the Amazon region has the most underdeveloped public facilities and the lowest economic and health indexes of the country.[72] Therefore, Texaco’s operations that caused pollution can in no way be justified and is a violation of the corporate social contract.

Texaco’s second violation of the corporate social contract is its abuse of the corporation’s political power to pursue profits through unethical means. As we established in the first section of this paper, Texaco possessed enormous bargaining power over the Ecuadorian state due to the company’s technological and financial powers. The corporation’s use of its political sway to evade environmental regulation for a long span of time violates the moral obligation of a corporation to civil society. As Professor Rose-Ackerman suggests in her paper on corruption, since the corporation’s commercial operations were only made possible by the legal and political systems of Ecuador, Texaco should not jeopardize these systems by political manipulation, but rather should fulfill its obligation to society and help maintain the authority and legitimacy of political and legal systems.[73]

The analyses of Texaco’s two violations by the corporate social contract has proven that the invisible contract could be a promising route to resolve the “Ring of Gyges” dilemma. According to the reciprocal obligations between civil society and corporations as productive organizations, even in the vacuum of strong environmental regulation in their host countries, multinational corporations still have a binding moral obligation to use the best technology possible to minimize the environmental harms their production might cause. This proposition is enlightening and instrumental not only in criticizing and evaluating a corporation’s actions, but also in providing normative guidance to corporate leaders when they face the “Ring of Gyges” dilemma in environmental decision-making.

Possible Refutation from Texaco and Author’s Response

Criticism on Corporation’s Moral Status

Hypothetically defenders of Texaco could attempt to invalidate the corporate social contract argument by questioning the moral status of corporations. They could argue that since only natural persons have moral obligations in traditional ethics and corporations are not natural, but artificial persons, hence corporations are not proper moral agents. Consequently, no abstract or moral contract can even exist between corporations and civil society. Therefore, corporations are amoral and lie beyond the jurisdiction of ethical standards.

This possible refutation, however, can only invalidate Peter A. French’s argument that “corporations can be full-fledged moral persons and have whatever privileges, rights and duties as are, in the normal course of affairs, accorded to moral persons”.[74] As R. E. Ewin argues, corporations are incapable of exhibiting any virtue or vice.[75] According to Ewin, virtue is “a matter of caring about certain sorts of things.” In other words, since corporations have no emotional life as the people who manage them do, they lack the emotional feeling that drives a virtuous individual human being to care decisions and deeds.[76] For example, motivation is an indispensible part of a virtuous deed. If I donate $1000000 to the orphans in Beijing out of sympathy, I can claim my action to be virtuous and kind because I am motivated my emotional feeling toward the orphans. However, when a corporation donates the same amount of money to establish a foundation, since it can neither care nor feel sympathy, we can’t claim that the corporation possesses a virtuous emotional motivation. Therefore, the hypothetical refutation by Texaco is valid insofar as it denies corporations the emotional basis for morality.

Nonetheless, this refutation does not invalidate the corporation’s identity as a Kantian moral agent with duties and rights, thereby failing to undermine the corporate social contract theory. From Ewin’s analysis, we conclude that corporations are incapable of exhibiting virtues. However, the lack of virtue or vice does not mean that the corporation does not have to fulfill its obligations or claim its rights. For example, as long as the corporation can repay its debt—even “with bad grace or only under the threat of legal penalty”—the corporation fulfills its obligation as a moral agent.[77] Therefore, for the purpose of constructing a moral social contract between civil society and corporations, it suffices to define corporations’ moral status in the Kantian perspective. This Kantian moral personality will enable corporations to enter contracts as moral agents taking into account rights and obligations in their decision-making process.[78]


Ever since media and NGO groups disclosed the pollution scandal more than twenty years ago, Texaco and its current parent company Chevron have received criticisms and allegations from various perspectives. This paper attempts to contribute to this endeavor by providing a moral criticism against Texaco’s environmentally irresponsible operations. Different from Heineman’s mainstream “high-integrity-high-performance” argument, this paper seeks to build the ethical standards through corporate social contract theory. The paper attempts to propose a normative solution to tackle a practical problem in corporate management.

Due to the time and space constraint, this paper has only constructed a relatively primitive version of the corporate social contract. Although this version of the corporate social contract succeeds in providing a normative criticism against Texaco’s actions and in offering an ethical solution to the “Ring of Gyges” dilemma, there are still various limitations on the argument presented in this paper. First, this paper only considers corporations’ moral obligations to civil society insofar as corporations are treated as productive organizations. But clearly corporations are multifaceted socio-economic entities that possess more identities than just productive organizations. Hence more research needs to be conducted in order to provide a more comprehensive understanding of corporations’ moral obligations to society. Secondly, the social contract model in this paper does not take into the role of cultural difference in determining business ethics. Since the social contract theory traces its origin in Western political thought, would it be possible that this methodology is only applicable in societies that embrace Western values? Or does this methodology capture a set of universally applicable principles that can find audience anywhere around the globe? Again, more research needs to be done in order to address these issues. Lastly, more elaboration is needed to evaluate whether all the terms and obligations in the corporate social contact are of the same moral weight. This is especially important in cases in which several obligations conflict with each other.

On the other side of the coin, these limitations reflect the argument’s potential for further development. As the Henry Ford II’s quote in the beginning of this essay asserts, our society demands a more socially responsible corporate world. The corporate social contract theory examined in this paper represents a promising route to provide normative support for this movement of ethical corporate decision-making. If adopted properly, this theory not only makes a respectable corporate public image, but also an upright corporate essence.

Dilong Sun (’15) is an Ethics, Politics, and Economics major in Pierson College.




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Clean Water Act, 33 U.S.C. 1251 1972.

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Donaldson, Thomas. Corporations & Morality. Englewood Cliffs, NJ: Prentice-Hall, 1982.

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Ells, Richard, and Clarance Walton. Conceptual Foundations of Business. N.p.: R.D. Irwin Inc., 1974.

Ewin, R. E. “The Moral Status of the Corporation.” Journal of Business Ethics 10, no. 10 (October 1991): 749-56.

French, Peter A. “The Corporation as a Moral Person.” American Philosophical Quarterly 16, no. 3 (July 1979): 207-15.

Friedman, Milton. Capitalism and Freedom. Chicago, IL: University Of Chicago Press, 1962.

Friedman, Milton. “The Social Responsibility of Business is to Increase its Profits.” New York Times Magazine, September 13, 1970.

Heineman, Benjamin W., Jr. “Ethics and Multinational Firms.” Lecture, Yale University, New Haven, CT, February 29, 2013.

Heineman, Benjamin W., Jr. High Performance with High Integrity (Memo to the CEO). Cambridge, MA: Harvard Business Review Press, 2008.

Hobbes, Thomas. Leviathan. Edited by Edwin Curley. N.p.: Hackett Publishing Company, 1994.

Kaptein, Muel, and Johan Wempe. “The Corporation as Social Contract.” Social Science Research Network. Accessed April 27, 2013. <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940396>.

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[1] Plato, Plato: Complete Works, N.p.: Hackett Publishing Company, 1997.

[2] Judith Kimerling, “Indigenous Peoples and the Oil Frontier in Amazonia: The Case of Ecuador, Chevrontexaco, and Aguinda v Texaco,” New York University Journal of International Law and Politics, no. 3 (March 2006): 413-665, 415.

[3] Martz, John D. Politics and Petroleum in Ecuador. (New Brunswick: Transactions Publishers, 1987), 370.

[4] Kimerling, “Indigenous Peoples and the Oil Frontier in Amazonia,” 424.

[5] Ibid, 426.

[6] Judith Kimerling, Amazon Crude, (New York: Natural Resource Defense Council, 1991), 336.

[7] Kimerling, “Indigenous Peoples,” 426.

[8] Ibid, 420.

[9] Gerhard Drekonja, Ecuador: How to Handle the Banana Republic Turned Oil State, (N.p.: Centro de Estudios Y Documentación Latinoamricanos, 1980).

[10] Kimerling “Indigenous Peoples,” 435.

[11]Ibid, 441. “We thought oil would generate a lot of money, and that development would benefit the country. But we did not have technical know-how, and no one told us that oil was bad [for the environment]” (Interview with General René Vargas Pazzos)

[12] Ibid, 436.

[13]In Texaco’s business contract with the Ecuadorian state, the corporation was required to “adopt suitable measures to protect the flora, fauna, and other natural resources and to prevent contamination of water, air and soil under the control of pertinent organs of the state” (Decreto Supremo No. 925, from General Guillermo Rodriguez Lara, President of Ecuador, Aug. 16, 1973); Ley de Aguas [Law of Waters], Decreto Supremo No. 369

[14] Suzana Sawyer, Crude Chronicles: Indigenous Politics, Multinational Oil, and Neoliberalism in Ecuador, Durham, (NC: Duke University Press Books, 2004), 116.

[15] Kimerling, “Indigenous Peoples,” 450.

[16] Ibid, 449.

[17] U.S. Department of Energy, A White Paper Describing Produced Water from Production of Crude Oil, Natural Gas, and Coal Bed Methane, Doc, (2004), 1.

[18] Ibid, 11.

[19] Kimerling, Amazon Crude, 65, 69, 144.

[20]The EPA “no discharge standard” dictates that it is “unlawful to discharge any pollutant from a point source into navigable waters, unless a permit was obtained” (http://www.epa.gov/regulations/laws/cwa.html))

[21] Steven Donzinger, “Oil in the Jungle: A Talk with Steven Donziger,” Lecture, Yale Environmental Law Association, New Haven, CT, February 14, 2013. See a photograph of the discharge pipes above.

[22] Amazon Watch [NGO], accessed May 2, 2013, <http://amazonwatch.org/work/chevron>.

[23] Ibid.

[24] Benjamin W. Heineman Jr., High Performance with High Integrity (Memo to the CEO). (Cambridge, MA: Harvard Business Review Press, 2008).

[25] Benjamin W. Heineman, Jr, “Ethics and Multinational Firms.” Lecture, Yale University, New Haven, CT, February 29, 2013.

[26] Milton Friedman,”The Social Responsibility of Business is to Increase its Profits,” New York Times Magazine, September 13, 1970.

[27] Milton Friendman, Capitalism and Freedom, (Chicago, IL: University Of Chicago Press, 1962), 133.

[28] Milton Friedman,”The Social Responsibility of Business,”1970.

[29] Muel Kaptein, and Johan Wempe, “The Corporation as Social Contract,” Social Science Research Network, Accessed April 27, 2013, 6, <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1940396>.

[30] Ibid.

[31] Thomas Donaldson, Corporations & Morality, (Englewood Cliffs, NJ: Prentice-Hall, 1982), 36.

[32] Thomas Hobbes, Leviathan, ed. Edwin Curley, (N.p.: Hackett Publishing Company, 1994), Chapter XIII 6-7.

[33] Ibid., XIV 1.

[34] Ibid., XIV 4.

[35] Ibid., XIII 13.

[36] John Locke, Second Treatise of Government, ed. C. B. Macpherson, (N.p.: Hackett, 1980), Chapter II, 6.

[37] Ibid., VII 87,88.

[38] Jean-Jacques Rousseau, The Basic Political Writings, ed. Donald A. Cress, (N.p.: Hackett Publishing, 1987), Chapter XI.

[39] Ibid.

[40] Donaldson, 40.

[41] Kaptein and Wempe, 5.

[42] Locke, IX 124.

[43] Kaptein and Wempe, 8.

[44] Donaldson, 40.

[45] Ibid, 42.

[46] Ibid.

[47] Ibid.

[48] Ibid., 43.

[49] Chief Justice Marshall, Dartmouth College v. Woodward, 4 Wheat 518.636 1819.

[50] Donaldson, 3.

[51] Ibid., 5.

[52] Ibid.

[53] Richard Ells, and Clarance Walton, Conceptual Foundations of Business, (N.p.: R.D. Irwin Inc., 1974).

[54] Donaldson, 5.

[55] Ibid., 45.

[56] Ibid., 44.

[57] Ibid., 43-44.

[58] R. H. Coase, “The Nature of the Firm,” Economica 4, no. 16 (November 1937): 386-405. accessed May 1, 2013, <http://www.jstor.org/betasearch>.

[59] Donaldson, 45.

[60] Donaldson, 46-48.

[61] Adam Smith, The Wealth of Nations, (N.p.: Simon & Brown, 2012), Book I, Chapter I, 1.

[62] Donaldson, 47.

[63] Kimerling, “Indigenous Peoples,” 427-28.

[64] Donaldson, 51.

[65] Ibid.

[66] James Madison, John Jay, and Alexander Hamilton, The Essential Federalist and Anti-Federalist Papers, ed. David Wootton, (N.p.: Hackett, 2003).

[67] Donaldson, 48.

[68] Donaldson, 45, 53.

[69] Donaldson, 54.

[70] Donzinger, “Oil in the Jungle,” 2013.

[71] Hari, Osofsky, “Environmental Human Rights under the Alien Tort Statute: Redress for Indigenous Victims of Multinational Corporations,” Suffolk Transnational Law Review, no. 2 (1997): 335-97, 338.

[72] Miguel San Sebastián, and Anna-Karin Hurtig, “Oil Exploitation and Health in the Amazon Basin of Ecuador,” accessed May 4, 2013, 7, <http://www.ghwatch.org/sites/www.ghwatch.org/files/oil.pdf>.

[73] Rose-Ackerman, Susan, “‘Grand’ Corruption and the Ethics of Global Business,” Journal of Banking & Finance, no. 26 (2002): 1889-918.

[74] Peter A. French, “The Corporation as a Moral Person,” American Philosophical Quarterly 16, no. 3 (July 1979): 207-15.

[75] R. E. Ewin, “The Moral Status of the Corporation,” Journal of Business Ethics 10, no. 10 (October 1991): 749-56, 749.

[76] Ibid., 751.

[77] Ibid., 755.

[78] Donaldson, 30.


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