LESSON 12: TOWARD A NEW

THEORY OF THE FIRM:

HUMANIZING THE FIRM
AND THE MANAGEMENT
PROFESSION
By: Jade R. Marañon
Princess May S. Palma
Jhon Carlo D. Manto
XII-GAS2 PURITY
 The Pro Mujer [“pro-woman”] Magic Sauce

Pro Mujer is a non-profit women’s development

organization dedicated to empowering women in Latin
America (Argentina, Bolivia, Mexico, Nicaragua, and Peru) to
break the cycle of poverty. The organization was founded in
Bolivia in 1990 by Lynne Patterson and Carmen Velasco, two
teachers who believed that education and easy, convenient
access to health and financial services were crucial for
women to climb out of poverty and to improve the lives of
their families.
 The project comprises of economic empowerment through financial
services that enable clients to start or grow small businesses, as well as
through group trainings and safe spaces in the Pro Mujer Centers, where
high-quality, low-cost primary health care is also provided. Pro Mujer
operates over 160 such Pro Mujer Centers and 25,800 solidarity groups,
also known as communal banks, consisting of around 15 micro-
entrepreneurs that support each other, share learnings and guarantee
each other’s loans. Each group is supported by a Client Advisor that builds
trust and helps keep clients in the program.
The success of this business model is clear in the numbers.
According to the Annual Report 2012/2013, Pro Mujer disbursed 1,374,500
loans with an average balance US $448 and a repayment rate greater
than 90%. These loans and related services helped improve the lives of
282,300 low-income women in Latin America and their 1.5 million family
members.
 Neo-Classical Theory of the Firm”

“Our highest priority going forward is to fix

our broken political system. Short of that, there
is no viable long term solution to our badly
warped economy.”

- Alan Greenspan, “The Map and the Territory”

 The first 15 years of the 21st century have at least two major global
financial crises. In 2001, everyone witnessed the high-profile scandals at
Enron, WorldCom, Global Crossing, and Tyco, among others and the
closing of the accounting firm Arthur Andersen that accompanied the
collapse of Enron. Numerous and voluminous news reports have
revealed huge failures by top executives and their advisers-including
accountants, investment bankers, and lawyers to fulfill their basic
fiduciary duties to serve the interests of shareholders and the public. In
2007-2009, we saw an even bigger economic crisis, which witnessed
the collapse of such old institutions as Lehman Brothers, among others.
After each financial crisis, the public across the globe becomes angry
and distrustful toward banks and financial institutions and their
regulators. What happened? Many analysts say that deeply flawed
ideas about economics and morality have influenced economic policy
and business practices to the detriment of the common good.
 In some Western countries, the broadly held consensus that
government should control macroeconomic policy has served to
concentrate power and wealth in the hands of a network of people,
organization, and ideas that flow between the financial and governmental
centers.
Why do economic crises occur? Some will tell you that crises are the
inevitable consequence of government meddling in markets; others will
maintain they occur because government did not meddle enough. Still
others will claim that there is no such thing as a bubble: markets are
perfectly efficient, and if housing values double or triple in the space of a
few years and then crash back down to earth—well, that is just the market
responding to new information. The same contradictions can emerge if
you ask economists what to do once a crisis has hit. Some will maintain
that government must intervene, becoming a lender of last resort and
providing a massive fiscal stimulus in order to counter the plunge in
private demand. Others will dismiss that approach as laughable, arguing
that government must never intervene in the machinery of the market.
 Doing so, they insist, will only prolong the hangover from the
crisis and will lead to a dangerous accumulation of public debt.
And some economists will claim with a straight face that the very
idea of a crisis is illusory, a fiction perpetrated by those who doubt
the market’s ability to allocate goods and resources with
astonishing efficiency (Roubini and Mihm, 2010).
The economic theories and trends that have come to dominate
modern management practice over the past 30-40 years need to
be re-visited. Before the misdeeds and recklessness of Enron and
Lehman Brothers, an entire corporate culture and society had
started down a slippery slope in the ’80s in its adherence to
agency theory. The cult of the free market and the maximization of
the shared value gave rise to a new breed of leaders who were
more individualistic, more materialistic, and more narcissistic.
 But it was not just the executives but whole companies that were
reduced to a mere balance sheet operation. Within such a culture,
employees were reduced to self-interested inputs into the corporate
machine. Given the dominance of economic theories based on self-
interest and a free market, the business landscape became bereft of
humanity, as people became like square pegs being hammered into
round holes (Ricart and Rosanas, 2012).
The assumption that individuals act rationally may be viewed as
ignoring important aspects of human behavior. Many see the homo
economicus (“economic man”) as being quite different from real people.
Many economists, even contemporaries, have criticized this model of
economic man. Large corporations might perhaps come closer to the
neoclassical ideal of profit maximization, but this is not necessarily
viewed as desirable if this comes at the expense of neglect of wider
social issues.
The response to this is that neoclassical economics is descriptive and not
normative. It addresses such problems with concepts of private versus
social utility. Neoclassical economics is also often seen as relying too heavily
on complex mathematical models, such as those used in general equilibrium
theory, without enough regard to whether these actually describe the real
economy. Many see an attempt to model a system as complex as a modern
economy by a mathematical model as unrealistic and doomed to failure.
Famous answer to this criticism is Milton Friedman’s claim that theories
should be judged by their ability to predict events rather than by the realism
of their assumptions. In the aftermath of the 2007-2009 global economic
meltdown, the profession’s attachment to unrealistic models is increasingly
being questioned and criticized. After a week-long workshop, one group of
economists released a paper highly critical of their own profession's
unethical use of unrealistic models.
Their abstract offers an indictment of fundamental practices:
"The economics profession appears to have been unaware of the
long build-up to the current worldwide financial crisis and to have
significantly underestimated its dimensions once it started to
unfold. In our view, this lack of understanding is due to a
misallocation of research efforts in economics. We trace the deeper
roots of this failure to the profession's focus on models that, by
design, disregard key elements driving outcomes in real-world
markets. The economics profession has failed in communicating
the limitations, weaknesses, and even dangers of its preferred
models to the public. This state of affairs makes clear the need for a
major reorientation of focus in the research economists undertake,
as well as for the establishment of an ethical code that would ask
economists to understand and communicate the limitations and
potential misuses of their models." (Lux et al., 2008)
The Humanistic Approach: Human Persons as
the Most Important Stakeholders
Management theory and practice are facing unprecedented
challenges. The lack of sustainability, increasing inequity, and the
continuous decline in societal trust pose a threat to “business as
usual”. Capitalism is at crossroads, and scholars, practitioners, and
policy makers are called to rethink business strategy in light of major
external changes (Pirson and Kimakowitz, 2014). Many extant studies
on corporate social responsibility (CSR) have used the concept of the
triple bottom line (TBL), coined by Elkington in 1994, which sought to
put together people, profits, and planet into one comprehensive
measure of performance. Nonetheless, there is a significant
shortcoming in using TBL to measure the full ecological performance
of a company since it does not clearly mention the degree of emphasis
that should be given to the domains identified in the model.
In addition, a problem with the triple bottom line is that the
three separate accounts cannot easily be added up. It is
difficult to measure the planet and people accounts in the
same terms as profits--that is, in terms of cash. The full cost
of an oil-tanker spillage, for example, is probably
immeasurable in monetary terms, as is the cost of
displacing whole communities to clear forests, or the cost of
depriving children of their freedom to learn in order to make
them work at a young age. Economic growth is undoubtedly
an important determinant; however, it is one of many
elements of human well-being. Social and ecological factors
are significant--and in some cases, the most essential-
constituents of well-being.
 PEOPLE is one of the domains that should be sustained in
inclusive and sustainable enterprise. The businessman has to
produce social cohesion, which refers to fulfilling individual and
community needs. A good resource allocation system for this purpose
is one that employs goods and capabilities in such a way that human
beings in the system improve and develop. But this is a function of a
moral and ethical leadership, one that is able to question some of the
basic assumptions about the way businesses are managed, one that
is able to face the moral and ethical questions of daily decision-
making in order to ensure human capital development. This in turn
will require a shift in paradigm, to one which is more humanistic, one
that factors in the complexity of human nature and emphasizes the
human being and its will to protect the species in the long term.
It has been shown that this humanistic paradigm provides the
foundations for a more sustainable business practice in the
following ways: (1) the companies are steadfastly purpose-driven;
(2) humanistic management styles as implemented in specific
firms aim to promote human development, which includes
psychological, physical, social, and financial dimensions; and (3)
managers in those firms are “servant leaders” and regard
themselves as stewards for the greater good. They are often
spiritually-grounded, self-effacing, and humble. They see their
roles as being guardians of a culture of dignity and serve as co-
developers of a learning community. They are grateful for and
excited about the opportunity that they have been given to
contribute in creating a better world (Treviño et al., 2000; Polo,
1991; Pirson and Kimakowitz, 2014; Racelis, 2014).
 It has been shown time and again that the accumulation of human
capital is an important contributor to economic growth. Numerous cross-
country studies extensively explore whether educational attainment can
contribute significantly to the production of overall output in an economy.
Several micro-studies that look into the same problem have shown a
consistently positive relationship between the education of the workforce
and their labor productivity and earnings. The general finding is that
individuals with more education tend to have better employment
opportunities, greater earnings, and produce more output than those who
were less educated. In addition, it has been increasingly recognized that
human population health is not just an input to socio-economic
development, but is an essential outcome and over time, a marker of
sustainability. Thus, adding human capital into the equation will lead to the
development of a more comprehensive measure of human ecology which
is defined as comprising a society’s culture, habitat, and its relation with
the wider environment (Son, 2010; McMichael, 2002).
A New Theory of the Firm for the 21st Century

The document "The Vocation of the Business Leader" speaks of the "vocation" of
the business men and women of our time who act in broad and diverse business
institutions: cooperatives, multinational corporations, family businesses, social
businesses, for-profit/non-profit collaborations etc; and of the challenges and
opportunities which the business world offers them in the context of intense
technological communications, short-term financial practices, and profound cultural
changes. In the document, business leaders are called to engage the contemporary
economic and financial world in light of the principles of human dignity and the common
good.
In the face of the growing concern about the current market economy not being able
to resolve the growing gap between the rich and the poor-indeed, growing swathes of
the world's population that continue to live under the poverty threshold, there have been
calls to shift the paradigm to a more humanistic one, which will focus further away from
the economistic approach that views man chiefly as homo economicus ("economic
man”) using assumptions about human beings who are not "real people“, but "utility
maps“ instead, whose wants and preferences are chiefly based on self-interest and
material goods.
Rather, the new humanistic paradigm wants human
dignity to be defended in the face of its vulnerability.
The dignity of the human being lies in its capacity to
define autonomously the purpose of its existence.
Because human autonomy realizes itself through social
cooperation, economic relations and business activities
can either foster or obstruct human life and well-being.
Against the widespread objectification of human
subjects into human resources, against the common
instrumentalization of human beings into human capital,
and a mere means for profit, humanistic management
advocates and uphold humanity as the ultimate end
and principle of all economic activity.
 This section of the book will develop and propose a renewed theory of
the firm based on an adequate anthropology, a notion of man as homo
humanus ("human man") with his true and real nature, as well as needs
and wants. This section will be based chiefly on the notions of the
Spanish philosopher and business professor. Juan Antonio Pérez
López (1934-1996) was a Spanish business theorist. He was a
professor of Organizational Behavior at the IESE Business School
(University of Navarra), where he became dean (1978-1984). He was
also a visiting professor at PAD Business School of the Universidad de
Piura (Peru) and IAE Business School of the Austral University
(Argentina). They gather together economic, anthropological,
sociological, and ethical aspects. After studying Actuarial insurance at
the Escuela Central Superior de Comercio of Madrid, Pérez López
spent five years in Hidroeléctrica Española SA. In 1961, he began to
teach at the IESE Department of Quantitative Analysis (today
Department of Accounting and Control).
In 1970, he received his PhD in Business Administration from
Harvard Business School with the thesis Organizational theory: A
cybernetic approach. From there on, he delved into issues like
motivation, learning, rationality, etc. He died on June 2, 1996, in a
vehicular accident.
Pérez López was a contemporary of Leonardo Polo, whose
transcendental anthropology described the human person as an
open and free system; which means to say that the human person
naturally tends toward self-gift, and his growth as a human being is a
function of this. In other words, the person’s being takes precedence
over his having: his having should be given over to a love for and
service to others, for this is the very essence of his personal being: a
being characterized by a free gift of self (Polo, 1997).
Having been influenced somehow by Polo, Pérez López
proposed three main activities that managers must carry out,
adding leadership capacity to the already extant strategic
capacity and executive capacity. Leadership capacity in the
thought of Pérez López has to do with what he calls
transcendent motives (different from the extrinsic and intrinsic
motives) are which refer to a genuine interest in the
development and motives of the other person that go beyond
considering exclusively future effectiveness. These refer to the
importance that each person gives to the influence that one’s
actions and decisions can exert on other people, that is to say,
the transcendent motives reflect the value given to the
repercussions of one’s decisions on others (Vélaz and Pastoriza,
2003).
 In turn, such transcendent motives at work in a leader bring about a
transcendental leadership defned by a relationship of personal influence, in
which interactions take place through extrinsic, intrinsic, as well as
transcendent motives. Thus, a transcendental leadership goes beyond
transformational leadership in the sense that it is a relationship of influence
between leaders and collaborators; that is to say, an inter-influential
leadership, one that is relational on the basis of a special kind of motivation
on the part of the leader to contribute to the good of those he leads
(Cardona, 2001). The anthropology of organizations of Pérez López also
distinguishes affective needs as the highest among three levels of needs.
These are the needs related to achieving satisfactory relationships with
other people and are associated with the need to establish that we mean
something to others and are liked as people. This entails being safe in the
knowledge that we are loved for what and who we are as opposed to being
appreciated merely because we have certain qualities or the fact that we
are useful.
 These notions, when applied to managerial context, tell us that a
fully human manager would be one who ensures the positive learning
in the follower and the formation of his character through the virtues.
We glean the transcendent, nature of such managerial function from
the Theory of Human Action in Organizations whereby Pérez López
(1991) explains that the human person in business organizations is
capable of having transcendent motives, which are aspects of reality
that determine the achievement of learning from other people with
whom the decision-maker interacts. Rosanas and Velilla (2003)
explain this quite well by saying that the ethical (read “morally good”)
manager is, thus, one who provides the motivational conditions for
the organizational members to achieve their full potential which, in
Polian terms, ultimately means being that free and open system who
is capable of self-gift, that radical love (a selfless interest in the good
of the other) proposed by Polo as a radical anthropological
transcendental.
 These theories of human behavior in the organization obviously
have implications for management, especially for a more humanistic
governance. For instance, as Rosanas (2008) explains, it has
implications for leadership effectiveness: only a transcendental
leadership can foster the unity and identification with the
organization, as well as loyalty and trust in firms, which are
necessary for good organizational functioning. What is the impact of
these notions of the company and the business leader on social
responsibility? Since the assumption about the human person is
changed, to one who has the intrinsic motive of wanting to
contribute to the good of others, then the manager's actions and
choices are now more ethical, that is to say, expected to be for the
benefit of human beings (inside and outside of the firm). This view of
the firm will thus encourage organizational members as well as
outside stakeholders to be more mindful of human dignity and the
common good.
Viewing the Firm from A Virtue Theory Lens

The previous section referred to superiority of a more

humanistic approach to business and management, that is, a
managerial approach whose outlook emphasizes common
human needs and is oriented to the development of human
virtue, in all its forms, to its fullest extent. This view of
governance based on the idea of human needs and human
values takes into account the connection between good human
performance and good organizational outcomes. In turn, good
human performance requires examining the character of
individual employees and the responsibilities associated with the
roles which those individuals play within organizations (Racelis,
2014; Melé, 2003; Maguire, 1997).
As they serve the larger community, individuals in
business organizations should strive to achieve
excellence through virtuous conducts. But institutions
should nourish virtuous acts and promote ethical
business conduct. This can be done through
incentives and rationales that justify and encourage
virtuous conduct at both individual and organizational
levels. These incentives and rationales, then, become
the driving force behind business engagement with
issues beyond the financial bottom line and the
movement toward sustainable social and
environmental practice (Wang, Cheney, and Roper,
2016).
Expressed negatively, it can also be said that vicious behavior has led to
undesirable outcomes. In a research project that sought to uncover
lessons for leadership from the 2008 global financial crisis, the term
character surfaced time and again amongst the participants in a series of
leadership forums across three continents. For example, the participants
described how arrogance and ego impeded decision-making, and in
contrast, how courage and prudence served others well in being able to
withstand pressure to pursue investments that were based on dubious
collateral or over-engineered financial instruments (Crossan,Mazutis, and
Seijts, 2013). Another study showed that prudence and ethics were
pushedaside as greed overcame good judgment among mortgage lenders
nationwide. Of course we can find large-scale failure of regulation and
government policy in the advent of the crisis, but also negligence and
greed on the part of the different actors who were empowered in the
process (Argandoña, Melé and Sanchez-Runde, 2011).
The necessity for viewing the firm from a virtue theory lens
can be gleaned from Aristotle (1990) in The Politics:
"For man, when perfected, is the best of animals, but,
when separated from law and justice, he is the worst of
all; since armed injustice is the more dangerous, and he
is equipped at birth with arms, meant to be used by
intelligence and virtue, which he may use for the worst
ends. Wherefore, if he have not virtue, he is the most
unholy and the most savage of animals,and the most full
of lust and gluttony. But justice is the bond of men
instates, for the administration of justice, which is the
determination of what is just, is the principle of order in
political society."
The level of moral reasoning in business
organizations is related to the choice of action
that is advocated and is connected to people's
value positions and stands on important
business issues. In other words, moral
judgment is not a value-neutral and purely
cerebral style of intellectualizing, but is
connected with values and virtuous decision-
making (Rest, 1980; Racelis, 2010).
The End