Social Goals in the Theory of the Firm: A Systems Theory View

• Published date: 01 February 2021
• Author: Vladislav Valentinov,Ingo Pies,Steffen Roth
• DOI: 10.1177/0095399720933826
• Date: 01 February 2021
• Subject Matter: Articles

https://doi.org/10.1177/0095399720933826

Administration & Society

2021, Vol. 53(2) 273 –304

© The Author(s) 2020

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DOI: 10.1177/0095399720933826

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Article

Social Goals in the

Theory of the Firm: A

Systems Theory View

Vladislav Valentinov1,2, Steffen Roth3,4 ,

and Ingo Pies2

Abstract

Drawing on Luhmannian social systems theory, this article revisits the

single- versus multiple-objective debate on the theory of the firm. Firms are

conceptualized as complexity reducing systems structurally coupled with

potentially risky environments, and profit maximization is considered as

a complexity reduction strategy for making sense of these environments.

Whereas single-objective approaches reflect cases when environmental

risks do not materialize into corporate sustainability problems, multiple-

objective approaches address these problems by increasing the corporation’s

environmental responsiveness beyond the profit maximization function.

Our systems-theoretic framework therefore identifies the common ground

between the two approaches and draws attention to the circumstances

under which they can claim validity.

Keywords

Niklas Luhmann, social goals of the firm, systems theory, theory of the firm

1Leibniz Institute of Agricultural Development in Transition Economics, Halle (Saale),

Germany

2Martin-Luther-Universität of Halle-Wittenberg, Germany

3Excelia Group, La Rochelle Business School, France

4University of Turku, Finland

Corresponding Author:

Steffen Roth, Department of Strategy, La Rochelle Business School, 102 Rue de Coureilles,

17000 La Rochelle, France.

Email: roths@excelia-group.com

933826AASXXX10.1177/0095399720933826Administration & SocietyValentinov et al.

research-article2020

274 Administration & Society 53(2)

Introduction

Niklas Luhmann’s theory of social systems is widely acknowledged to gener-

ate powerful implications for public administration scholarship. Luhmann

saw modern society as functionally differentiated, that is, decomposed into

function systems such as economy, politics, law, science, and others. These

systems are highly interdependent, yet mutually incommensurable, with none

of them occupying a privileged position of any sort. As each of these systems

follows its own imperatives and observes reality from a unique point of view,

regulatory failures become as likely as not (Dunsire, 1996, p. 299). In such a

setting, a key challenge for administration and governance is ensuring a cer-

tain minimally required degree of coordination in the midst of the prolifera-

tion of disparate logics and rationalities (van Assche et al., 2014). This

challenge is non-trivial for at least three reasons elaborated by Holmström

(2005): functional differentiation aggravates the overall conflict between

independence and interdependence, results in the transformation of dangers

into risks, and is marked by a growing inadequacy of traditional law

(Holmström, 2005).

At the same time, public administration scholars have identified a variety

of plausible governance strategies that are consistent with the autonomy and

self-referentiality of individual function systems (e.g., Dunsire, 1996). Some

of these strategies include trust and multifunctional governance (Roth et al.,

2019), semantics (Neisig, 2017), and management (Roth, 2019; Roth et al.,

2020; Will et al., 2018). Another widely discussed strategy is reflexive law

which “seeks to ensure a representation of a plurality of views and to stimulate

system-internal reflection and responsiveness to societal needs through proce-

dural forums providing for participation” (Buhmann, 2019, p. 6). The UN

Global Compact is an example of a reflexive law instrument aimed at tackling

overarching business challenges that go beyond the governance capacity of

individual governments and corporations (Buhmann, 2019, p. 13). Holmström

(2005, 2007) explains that the evolving governance problems of the function-

ally differentiated society induce organizations of all kinds to be increasingly

concerned with their legitimacy and to develop public relations campaigns

intended to favorably influence the public opinion. The list of governance

strategies for navigating the regime of functional differentiation is potentially

infinite, yet each of them presents a variation on the theme of attaining coor-

dination of autonomous but interdependent social systems.

The purpose of the present article is to connect this Luhmannian theme to

an ongoing debate among management and business ethics scholars, and a

debate on the proper goals of the business firm (de los Reyes et al., 2017;

Donaldson & Walsh, 2015; Heath, 2014; Jones & Felps, 2013a; Lee, 2018;

Valentinov et al. 275

Mitchell et al., 2016; Pies et al., 2019; Roth et al., 2018; Valentinov et al.,

2019; van der Linden & Freeman, 2017). Prominent in the debate are two

standpoints known as the single-objective approach and the multiple-objec-

tive approach to the theory of the firm (Pies et al., 2019).

The single-objective approach stresses that the firm ought to pursue the

goal of long-run profit-maximization. Jensen (2001, p. 10) justifies this

approach by suggesting that “it is logically impossible to maximize in more

than one dimension at the same time.” Similar concerns were raised by

Friedman who objected to the idea of corporate social responsibility on the

grounds that managers would lack a principled mechanism of decision-mak-

ing for engaging in such practices. As a normative stance, the goal of long-

run profit maximization registers in Friedman’s maxim that “the social

responsibility of business is to increase its profits,” and can be derived from

Smith’s (1776) seminal thesis that “consumption is the sole end and purpose

of all production.” In contrast, the multiple-objective approach assumes a

much greater variability in the legitimate goals of the firm. According to this

approach, these goals may include advancing interests of stakeholders other

than shareholders; pursuing general welfare rather than private interests; pro-

mote sustainability instead of generating negative side-effects; and assume

political responsibilities (Pies et al., 2019, p. 2). The firms guided by this

approach are supposed to take a multidimensional view of social welfare

(Donaldson & Walsh, 2015; Mitchell et al., 2016; van der Linden & Freeman,

2017) and orient their activities toward the creation of “social value” (e.g.,

Hall et al., 2015), “collective value” (e.g., Donaldson & Walsh, 2015), “stake-

holder happiness” (Jones & Felps, 2013b), or “thick valuation” (van der

Linden & Freeman, 2017).

On a Luhmannian view, the debate on the goals of the firm attests to the

complexity of the governance challenge of attaining the coordination of the

autonomous logic of the economic system with the logics of other autono-

mous functional and social systems on which the former system critically

depends. Thus, a Luhmannian view may inform the theory of the firm by

presenting the social goals of the firm as a coordination device necessitated

by the governance challenges of the regime of functional differentiation. In

fact, the new insights enabled by a Luhmannian view may go even deeper. At

the hands of Luhmann, systems theory emphasizes the precarious nature of

the relationship of social systems, such as corporations, to their societal and

natural environment. Accordingly, if the Luhmannian systems theory is

accepted as a theoretical platform, there might be room to argue that the nor-

mative validity of the social goals of the firm, advocated by the multiple-

objective approach, depends on the state of the precariousness of the relevant

system–environment relations (cf. Schneider et al., 2017).