THERESA MARIE B.

PRESTO
BS ARCH 4B

NEXUS THEORY
Nexus means connection or link.
With regard to taxation matters (especially sales tax), it was
well accepted theory that in case, any State has a connection
with the sale transaction (say seller or buyer resides in the
state), the state is competent to impose tax on such
transaction.
Meaning thereby, that in case of interstate sale, both states
(the state where seller is situated and the state where buyer is
situated) used to levy tax.
Thus, each state having a territorial nexus with the sale, used
to levy tax, with the result that the same transaction had to
suffer tax in different states with the associated hardship to
trade, resulting into higher burden of tax on the ultimate
consumers.
The Law makers were aware of this problem. Therefore,
they introduced Entry 92A and amended Article 286 of the
Constitution of India, imposing restrictions on State power to levy
tax, on the following transactions:
o Interstate sale/ purchase
o Export sale/purchase
o Import sale/purchase
o Sale outside the state (means local sale inside some other state
Thus, nexus theory has lost its relevance after amendments in
the Constitution f India.
 NEXUS-OF-CONTRACTS THEORY

Orthodoxy in business management and business ethics is currently

occupied by a deontological Nexus-of-Contracts Theory, whereby: each
constituency or stakeholder group bargains with the firm over a set of
rights that will protect the firm specific assets that it makes available for
production. Within that broad framework, two opposing sub-theories can
be identified and contrasted: stockholder theory (which is grounded in
libertarianism) and stakeholder theory (which is grounded in
egalitarianism). Boatright convincingly argues that the debate between
stockholder and stakeholder theories is elucidated by this more general
Nexus-of Contracts approach and that stockholder theory wins that
head-to-head competition.

Lets start with a few general observations on the Nexus-of Contracts

Theory. First of all, the theory is based on the basic Enlightenment
concept of a social contract, which builds on the idea that we can forge
social theory based on how, rational, self-interested, individuals would,
hypothetically, bargain with one another in the absence of coercive forces.
In short, under certain objective circumstances, rational self-interested
agents will chose cooperation over predation.

The Nexus-of-Contracts Theory claims to be both descriptive and

prescriptive. It is descriptive in so far as it accurately depicts the nature of
the corporation. Indeed, the most casual empirical observation reveals
that corporations are, in fact, comprised of groups of interacting human
beings (bargaining) stakeholders (stockholders, consumers, managers,
employees, consumers etc.). It is also evident that these relationships are
shaped by both the invisible hand of the market and the visible hand
of corporate law as enforced by sovereign governments. The Nexus-of-
Contracts theory holds that corporations are actually legal fictions that
are socially constructed in order to minimize contracting costs
associated with cooperatively negotiating the conflicting interests of
contractors, most notably the cost of monitoring compliance.

But it is also empirically evident that, worldwide, corporate laws

vary between the microsocial contracts of national or state
governments. This, of course, suggests a degree of descriptive relativism.
Therefore, one of the puzzles facing the Nexus-of-Contracts Theory is
whether business ethics is hopelessly mired in cultural relativism or
whether there are, at least some, hypernorms that constitute the basis
for universal human rights.
Now in order for the Nexus-of Contracts Theory to be both descriptive and
prescriptive (or normative) it must do more than explain how the various
classes of stakeholders (stockholders, consumers, managers, employees,
consumers etc.) in fact bargain (or would bargain) in the real world within
various environments. It must also prescribe moral and/or legal rules
that govern how stakeholders ought to bargain, prescribe impartial rules
dictating whose interests ought to prevail under various competitive
conditions, and prescribe what role markets and national governments,
and international governing bodies ought to play in this process.

All human societies enforce prescriptions through both legality (laws

enforced by the coercive power of government) and through morality
(rules enforced by tradition, convention, and/or social learning). For most
philosophers, there are important distinctions between legality and
morality, and between legal rights and moral rights. Much of this
debate focuses on the use of coercion in the enforcement of legal and/or
moral rules. Kant, for example, distinguished between a good citizen
(who obeys the law out of fear of getting caught) and a good person
(who obeys the law out of love and respect for the law itself). So much of
the distinction between legality and morality hinges on the use of the
coercive power of the state. Both the egalitarian and libertarian wings of
Western liberalism take the view that there at least some universal moral
rules that all rational contractors will uphold in the absence of coercion.
The most serious challenges to a naturalistic closure of the is-ought
to gap has come from a motley crew of philosophical realists. Some
realists point out that, empirically speaking, human beings that occupy
the so called real world do not always act rationally, do not always act
out of individual self-interest, do not always cooperate, rarely act out of
impartiality, and often do not make decisions in the absence of coercion.
Moreover, human beings do not always know the Truth and if they do
know the Truth, they often conceal it or distort in order to advance self-
interest. Therefore, at least on the surface rationality, individuality, self-
interest, free will, impartiality, and Truth appear to be more prescriptive
than descriptive. Other realists point out that there is a lot of perfectly
natural human behavior that runs counter to our most basic moral
intuitions: predation of the weak by the strong, male violence, war,
ethnocentricity etc. But the most daunting challenge to closing the is-
ought to gap is the fact that when human beings do naturally pursue
rational self-interest, they all too often do it at the expense of the rational
self-interest of others. Hence, it may be perfectly natural for human
beings to violate contractual obligations, and reconstruct the Truth out of
self-interest. But that doesnt mean that this behavior is good!

The classical and neoclassical economic traditions argue that the

natural pursuit of rational self-interested atomic individuals
axiomatically leads to the social good. However, Machiavelli, Hobbes, and
the realists emphasized the essential role of coercive legality as a bulwark
against the unbridled pursuit of self-interest by predatory, powerful
individuals and groups. The Nexus-of-Contracts approach takes realism
seriously by emphasizing legality, but can it also deal with morality?
 In the real world, bargaining position between self-interested
constituencies is naturally determined on the basis of an unequal
distribution of power, which is to say that it takes place under conditions
of unequal liberty. Hence, in the real corporate world there are times
and places where the interests of power-wielding stockholders prevail over
the interest of employees and managers (CEOs); there are times and
places where power-wielding unionized employees prevail over the
interests of stockholders and CEOs; and there are times and places where
the interests of power-wielding CEOs prevail over the interests of both
stockholders and employees. If a manager hopes to redistribute the
prevailing distribution of power he/she must do so from a position of
superior power. The key here is that there are important differences
between Knowledge and Power. In terms of ethics, there is a big
difference between Knowing whats right and Doing whats right.
A close reading of Machiavelli suggests that bargaining in the real
world is not a simple matter to be resolved based on linear calculus.
Distributions of power are invariably influenced by not only background
institutions, information (and misinformation), and the aggregated (and
often irrational) decisions of other self-interested stakeholders, but also by
raw chance, or emergence. In terms of management theory, this makes
short-term planning very difficult and long-term corporate planning an
exercise in futility wrought with

Unanticipated consequences. Evolutionarily-based political theorists,

including Machiavelli, emphasize the reality of chance variation
(emergence) and its implications for the long-term and short-term
management of nations and corporations.
Moreover, according to Machiavellian theory, any manager that hopes to
maintain power over other self-interested stakeholders, and preserve the
corporation, would have to resist the lure of self-interest and partiality and
manage the corporation as a social utilitarian. Of course, any social
utilitarian must not only possess knowledge of what constitutes the
public good (over the short term and/or the long term) and knowledge
of the means to achieve it; but also the power to alter the status quo.
Moral intervention and the upending of the status quo, therefore, imply
both Knowledge of a more justified distribution and the Power to execute
that distributional scheme.

So, if we expect managers, stockholders, consumers, managers,

and/or employees to cooperate and transcend their own atomic (or
collective) self-interest, and pursue the larger social good theyll need
both knowledge and power. Any leader that aspires to manipulate or
control the relations of power between self-interested stakeholders will
need to possess not only knowledge of ends and means, but also possess
superior fire-power, and the willingness to occasionally utilize that
coercive power (or as Machiavelli put it: enter into evil) and employ
immoral means in order to serve the greater good and insure the survival
of the corporation or the nation. However, the most serious lacunae in the
Machiavellian formula is that evolutionary biology casts doubt on whether
we can reasonably expect to cultivate altruistic utilitarian behaviour in
corporate and political leaders, in the absence of coercive governmental
institutions. In short, morality alone may not be an efficient bulwark
against corporate corruption among powerful leaders.

So any contractarian prescriptive theory of the modern corporation

must account for the realities associated with bargaining over conflicts of
interest when there is natural inequality of bargaining power between the
various stakeholders via a rights-based moral theory. Although real
world managers (and other stakeholders) are described as natural
egoists in pursuit of self-interest, Machiavellians prescribe that managers
ought to be utilitarians that serve the interests of the corporation over
their own personal self-interest. But moral prescriptions are notoriously
weak in the absence legal prescriptions backed by coercive force. As, the
Enron Scandal graphically illustrates, in the real world, the most powerful
corporate stakeholders (in Enrons case it was upper management) will
naturally pursue self-interest at the expense of the least advantaged
stakeholders unless they are constrained by legal sanctions enforced by
well armed external private regulators (auditors) and public regulators
(SEC). Hence, the Nexus-of-Contracts Theory must take into account the
ever-changing power relationships between contracting stakeholders and
government.