Corporate Constituencies Research Articles

Sustainable Directors’ Duties and Reasonable Shareholders

This paper will examine the sustainability of directors’ duties from two perspectives, namely that the duties are stable in their own right and that they cover enough ground for them to help achieve sustainable goals. First, we will examine how directors’ duties to act in a company’s best interest operate well when shareholder interests are aligned. These duties, when breached, can be ratified by shareholders given the traditional understanding that they are the company. This may, in turn, have been associated with the growing acceptance of shareholder primacy over the past 40 years, seen most recently in the UK Supreme Court decision in BTI v Sequana (2022). The Supreme Court, however, also discussed the limitations of shareholder ratification, and its interaction with the rules protecting creditors, particularly as regards capital maintenance. Those rules have, however, been weakened, and private law has had to step in to address the abuse those rules were aimed at. Where the substantive content of directors’ duties is concerned, the focus everywhere is on how to make directors take account of external constraints such as environmental, social and governance (ESG) concerns and corporate purposes that may contradict enhancing shareholder value (as well as existing shareholder protection) as an established paradigm of company law. We will also analyse the difficulties in accommodating the interests of other internal constituents, like creditors (some of whom may have been externalised). This paper will build on earlier suggestions that the proper purpose rule has a part to play in balancing the interests of corporate constituents both inter and intra se and even in considering the position of future shareholders. The test of what is in the best interest of the company may not provide enough balance in this regard, as seen perhaps from the recent failed derivative action sought by some shareholders of Shell against its directors, and directors should take account of the interest of the reasonable shareholder in capturing the gist of what ESG should aim at.

Social Movement Ruptures and Legacies: Unpacking the Early Sedimentation of the Anti-European Super League Movement in English Football

Building on Della Porta’s work on social movement events, critical junctures, and legacies, this article studies the discursive practices, emotions and networks of the instant 48-hour mobilizations of the anti-European Super League (ESL) movement in English football in April 2021. In doing so, we show how this case reveals a new generation of conflict between the different supporter demographic and corporate constituencies that characterize elite football in England, and their politicized temporal structures. Showing how social movement ‘legacy’ operates as a multifaceted concept of power and time, we argue that the ‘puzzling out’ of a new post-ESL regulatory regime in football reveals the tensions between what are considered legitimate, and illegitimate, practices, which characterize the moral economy of the contemporary English football crowd.

Does public scrutiny on corporate tax decisions affect directors? Effects of responsible (irresponsible) corporate tax practices on director reputation

In 2004, the Citizens of Tax Justice (CTJ) released a report that significantly raised public awareness of corporate tax avoidance practices in the companies that it scrutinised in the study. Using a six-year period straddling the CTJ event, we compare over time changes in external board seats held by incumbent directors serving scrutinised firms against those of their counterparts serving control firms with comparable tax practices but that were not scrutinised in the CTJ study. Incumbent directors in scrutinised firms with minimal tax avoidance practices gained more external board seats after the CTJ event than did board members in control firms. However, directors in scrutinised firms with aggressive tax avoidance practices neither gained nor lost more external board seats after the CTJ event than did directors in control firms. These findings provide little evidence that constituents in the corporate sector overwhelmingly favour tax minimisation practices as acceptable practices of conducting business operations. Rather, they provide evidence that corporate constituents, like their social peers, are somewhat attuned to the expectation for socially responsible tax practices. Lastly, we find that directors in scruitised firms with minimal tax avoidance practices are more likely to gain board seats from like-minded firms with responsible tax practices.

Corporate Governance and Accountability in an Evolving Political Environment

The political environment of corporations has been evolving rapidly. There has been increasing pressure to hold corporations accountable for social, environmental and political aspects of the business enterprise – even the very purpose of the corporation has been challenged. The salience of corporate matters has increased overall as a result of changes in the political environment and an increasing awareness of corporate externalities. With the growing economic and political significance of corporations, corporate governance has emerged as a relevant framework for political action. These developments have affected the relationships among corporate constituencies and the boundaries of the corporate enterprise. Based on a political approach to corporate governance, this paper considers the resulting implications for the legal premises of corporate governance in an EU context. The paper argues that current corporate structures may not reflect the requirements of the rapidly evolving political environment. Corporate governance, corporate social responsibility, politicization of the corporation

IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance?

IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance?

International corporate constituency as a human problem

ABSTRACT This article frames constituency in relation to international corporate persons (ICPs) as a Jessupian ‘human problem’, constructively and politically. Drawing from examples in international trade law and international investment law it demonstrates the transformative power of ICP interests in the making of contemporary international economic law (IEL). It then analyses the logics of the economic and legal thinkers who facilitate this power in IEL and suggests these logics enabled a corporate constituency that separates the interests of the law from the interests of humans, both as subjects of law and as sources of institutional legitimacy. In the process, it shows that at least one ‘human problem’ with IEL’s corporate constituency—and by extension IEL itself—is that it is based on domestic market wisdoms projected internationally. By failing to account for the political and legal influence of the most significant transnational market participants, IEL is structurally insulated from human problems.

Singapore as International Debt Restructuring Center: Aspiration and Challenges

According to some economists, the deglobalization of the world has commenced. While that is true of trade and of ideas, it may not reflect the experience of existing companies undergoing restructuring which have in a sense been locked into a previous matrix where its assets and stakeholders were widely dispersed throughout the globe. This has created anomalies in the handling of worldwide insolvency cases which comes up against both protectionism, including judicial competition for such cases leading to less universalism in some situations, as well as the realignment of interests between the various corporate constituencies due to Covid-19, which may have further strengthened the hands of shareholders at the expense of other stakeholders as companies are kept afloat. In Singapore the government decided to develop Singapore into an international center for debt restructuring as part of its strategy to export its services and for this purpose embarked on an ambitious project to reform both its domestic and crossborder insolvency laws. The hybrid scheme was created by injecting some US bankruptcy law elements into the ‘English’ scheme of arrangement. The UNCITRAL Model Law on Cross-border Insolvency, in the form of the Third Sch of the Insolvency, Restructuring and Dissolution Act 2018 (IRDA 2018), was also adopted. Providing a forum for distressed companies in the region to restructure their debts without having to travel to London or New York is a positive development for Singapore and the region. The hybrid scheme is a path-breaking innovation so challenges to its design and operation are unavoidable. But its structure is flexible enough to allow for judicial creativity to fill gaps and to prevent its abuse. The courts face less challenges in interpreting the Third Sch, and has achieved some success in fostering cooperation and communication in cross-border insolvency matters between courts, but the domination of family companies, fragmentation of credit and weak legal institutions in the region may be more difficult challenges to Singapore’s aspiration to serve as the regional restructuring hub.

International Corporate Constituency as a Human Problem

This article sets out a high-level framing of constituency in relation to international corporate persons (ICPs) as a Jessupian ‘human problem’. It then draws from examples in international trade law and international investment law to demonstrate the transformative power of ICP interests in the making of contemporary international economic law (IEL). From there, it analyzes the logic of the terms used by IEL’s economist and lawyer architects and suggests these logics enabled a corporate constituency that separates the interests of the law from the interests of humans, both as subjects of law and as sources of institutional legitimacy, accelerating during and after the 1970s. In the process, it shows that at least one ‘human problem’ with IEL’s corporate constituency is that it is legally insulated from human problems and explores solutions.

The Illusory Promise of Stakeholder Governance (Presentation Slides)

The presentation slides in this document provide an overview of our study, The Illusory Promise of Stakeholder Governance, which will be published by the Cornell Law Review in December 2020. Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” Our study critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders. Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously. The document is based on presentations slides we prepared for various presentations of our study, including at the University of Chicago, Columbia Law School, Harvard Law School, the Big Debate on Stakeholder Capitalism at Oxford, and the ECGI-Stockholm Conference on Sustainable Finance. Our study on The Illusory Promise of Stakeholder Governance is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Another part of this research project is For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Ten adverse outcomes when manager focus on creating shareholder value: a review

This paper surveys the literature criticizing the view that managers should run companies aiming to create shareholder value by maximizing stock prices. Based on a multidisciplinary approach, I include empirical and theoretical papers from fields such as corporate law, management, finance, economics, business ethics, social psychology, and sociology of organizations. Ten main harmful effects from the adoption of the shareholder value paradigm stand out. I also add to the literature by presenting anecdotal evidence through short business cases illustrating these adverse outcomes. Together, this growing literature provides compelling evidence that governing companies in order to maximize current stock prices might lead to severe negative consequences for all corporate constituencies, including society and shareholders themselves.

The Corrosion Critique of Benefit Corporations

This Article evaluates what it labels the corrosion critique of benefit corporation statutes. These statutes have emerged as the leading new statutory alternative to enable and encourage social enterprises, businesses which seek both to generate financial returns for their investors while also pursuing social missions. Some persons who strongly support social enterprises have criticized benefit corporation statutes, arguing that they create a mistaken impression that companies organized under ordinary corporation statutes cannot consider the interests of non-shareholder stakeholders except insofar as doing so benefits shareholders in the long run. This corrosive effect on the understanding of most corporations may impede the adoption of socially responsible behavior. The Article distinguishes three conceptions of the legal purpose of corporations and whose interests officers and directors should consider: shareholder-only, stakeholder-optional, and stakeholder mandatory. It also identifies two leading justifications of benefit corporation statutes. The enabling justification asserts that corporate law constrains the ability of directors and officers to consider the interests of stakeholders other than shareholders because it imposes the shareholder-only conception of corporate purpose. The branding justification asserts that benefit corporations help companies attract investors, customers, and employees by giving them a way to credibly commit to considering the interests of other stakeholders through adopting the stakeholder-mandatory conception. Having established these categorizations, the Article offers a mixed verdict as to the validity of the corrosion critique. The critique does not apply to the branding justification. For the enabling justification, the critique is mostly valid in states with corporate constituency statutes, since such states have adopted the stakeholder-optional conception for ordinary corporations, and thus it is false to imply (as the enabling justification does) that ordinary corporations are constrained in considering the interests of various stakeholders. The corrosion critique does not, however, apply in Delaware and probably other non-constituency statute states, which have adopted the shareholder-only conception for ordinary corporations. The Article concludes that advocates of benefit corporations should stop using the enabling justification, which is subject to the corrosion critique in over half of all states (those with constituency statutes), and which justification is weak on other grounds as well. Focusing on the branding justification will direct transactional lawyers and businesses to the right reasons for considering becoming a benefit corporation, and will focus policymakers and scholars on the right questions to ask in evaluating the usefulness of benefit corporation statutes.

Rehabilitating Corporate Purpose

In this essay, I address how the ascendance of the theory of shareholder value maximization into the central consciousness of public corporations and its canonization as the only legitimate expression of corporate purpose has contributed to both a widening breach between American-style capitalism and justice and increased alienation of the public from capitalism as a system of economic governance. Despite the vast academic literature and many management testimonials advocating a broader conception of corporate purpose — one that addresses the interests of firms’ multiple constituencies and the well-being of their employees, customers, and operating environment — shareholder value maximization remains the de facto expression of corporate purpose and guide for decision making for most publicly owned firms in the United States (and the United Kingdom). I argue that narrowing the compatibility gap between capitalism and justice and reversing declining public trust in contemporary capitalism requires a very different conception of corporate purpose — one reflecting established moral and economic principles that challenge those underlying the shareholder value maximization doctrine. To this end, I start by discussing the vulnerability of contemporary capitalism, which is largely rooted in the social and moral disengagement of firms operating under this doctrine. I then explain how the emergence of the doctrine over the past four decades has led to this social and moral disengagement, what the theoretical underpinnings of the shareholder value maximization doctrine are, how this doctrine has become so deeply ingrained in our capitalist system, and the conceptual and practical problems presented by this doctrine and related theory of the firm. Next, I propose an alternate, principle-based guideline for corporate purpose that blends Aristotle’s theory of reciprocal justice with considerations of corporate purpose, along with Chester Barnard’s compatible theory of business organizations as cooperative systems. Aristotle stresses the ethicality of cooperation in transactional settings; Barnard stresses the efficiencies and adaptive benefits flowing from cooperation. Both see utility in truly reciprocal, cooperative relationships, which is not a priority in a shareholder value maximization regime. This alternative approach — referred to as ethical reciprocity — not only provides the basis for a rebuttal of the shareholder-primacy doctrine based on principles of justice and economic efficiency, but also offers a practical guideline for balancing the interests of shareholders and other corporate constituencies in the conduct of everyday business affairs. After presenting ethical reciprocity as a justice-sensitive guideline for corporate purpose, I turn to two practical questions related to its implementation: (a) whether “reciprocity practitioners” can compete in a world dominated by shareholder value maximizers, and (b) if so, what asset holders and asset managers, corporate directors, and educators can do — and, in some instances, are currently doing — to foster increased attention to both the principle and spirit of ethical reciprocity in the definition and pursuit of corporate purpose.

Law & Economics of Banks Corporate Governance in the Bail-In Era

The paper aims at introducing an in-depth analysis of Banks Corporate Governance in the after-crisis regulatory environment, going through theoretical and methodological specifications for starting an economic analysis of the post-crisis stream of reforms in the financial system, especially in the Eurozone. In a nutshell, this research has two main purposes: on the one hand, assess whether departures from standard corporate governance paradigms in banks are desirable; on the other hand, shed light on the impact of the rules on the resolution of distressed institutions on governance mechanisms. To achieve those goals, the paper carries out a survey the literature about Bank Governance and Bail-in Regulation in a functional manner to introduce the unexplored link between the new resolution regime and Corporate Governance, focusing the governance role of bail-inable creditors, as “potential residual claimers”. The literature review is supplemented and enriched by the necessary theoretical tools to properly set a Law & Economic analysis, both for what concerns specific agency relationships between corporate constituencies and the nature of financial regulation and bank insolvency. The paper concludes that the after-crisis reforms, and the bail-in regulation, in particular, represent the cornerstone for a new understanding of the relationship between corporate constituencies of banks. Moreover, the links between governance-related issues and the effectiveness of resolution mechanisms constitute a solid argument in favor of a positive role of Corporate Governance in addressing individual as well as systemic stability issues.

The Ambiguous Duty of Corporate Directors

This paper addresses the question of whether boards of directors of public corporations have a primary duty to the corporation itself or to the shareholders of the corporation. It suggests that proponents of each side of this long-standing debate appear to be more divided not over the “duty to whom” question, but rather over questions of whether directors in fact make value enhancing decisions, how the outcomes of their decisions are measured, and how increases in value are distributed among various competing corporate constituencies. The paper concludes that resolution of conflicting views on this topic lies in a well-established legal principle, the business judgment rule.

Shareholder Primacy, Labour and the Historic Ambivalence of UK Company Law

Most directors and senior managers of UK companies would likely regard it as trite law that, in undertaking their managerial and/or control functions, they are accountable first and foremost to their employer firm’s general body of shareholders. It follows that the interests of other corporate constituencies – and, in particular, those of employees – must ultimately cede to those of shareholders in the event of conflict. Although frequently taken for granted today, the lexical priority that the British company law framework affords to the interests of shareholders over those of other corporate constituencies is remarkable, not least when viewed alongside the correspondingly disempowered corporate governance status of labour in the UK. However, whilst the centrality of shareholders’ interests to the doctrinal and normative fabric of contemporary UK company law is both manifest and incontrovertible, this has curiously not always been the case. In this paper I argue that, whilst UK company law might look substantively stable and well-settled on its surface today, on closer inspection this facade of apparent calm can be seen to mask a fairly recent history of doctrinal and ideological turbulence with regard to fundamental underlying concerns. There is thus cause to question whether the basic normative impetus of the UK’s company law framework is as complementary to its surrounding economic and socio-political context as might first appear.

Conceiving Corporate Governance for an Asian Environment

Most Asian corporations are vehicles used by a separate system or social network – such as a family, a state or a political party. The challenges presented by the corporation operating as a system within a system are in most instances ignored. The dominant model of corporate governance understands the company as a collection of otherwise unrelated individuals united for the sole purpose of profit. It recognizes the systematic environments in which corporations exist only to the minimal extent necessary to check and punish conflicts of interests, assess compliance with duties or determine whether dominant behavior is unfair. At most, social networks like families are recognized as potential sources of power and information asymmetries that exploit other corporate constituencies. This ignores a deep body of empirical scholarship demonstrating the advantages enjoyed by family enterprises – from profitability and longevity to lower executive compensation and transaction costs. This paper uses institutional and systems theory tools to begin development of a model of corporate governance dynamics that takes real account of the systems that coexist with the corporate vehicle, using the initial examples of the family and the political party. The paper formulates “structural couplings” (Luhmann) through which value systems can meaningfully communicate with the governance systems of the corporation.

Ten Adverse Outcomes When Managers Focus on Creating Shareholder Value: A Review

This paper surveys the literature criticizing the view that managers should run companies aiming to create shareholder value by maximizing stock prices. Based on a multidisciplinary approach, I include empirical and theoretical papers from fields such as corporate law, management, finance, economics, business ethics, social psychology, political economy and sociology of organizations. Ten main harmful effects from the adoption of the shareholder value paradigm stand out. I also add to the literature by presenting anecdotal evidence through short business cases illustrating these adverse outcomes. Together, this growing literature provides compelling evidence that governing companies in order to maximize current stock prices lead to severe negative consequences for all corporate constituencies, including society and shareholders themselves.

The Corporate Law Dilemma and the Enlightened Sovereign Control Paradigm: In Search of a New Legal Framework

This article is centred on the proposal of a new model of corporate decision-making: the enlightened sovereign control paradigm. In revisiting the long-standing academic debate on the corporate objective, typically enshrined in the dichotomy between shareholder value and stakeholder theory, a critique of these existing models is put forward. It questions in particular the existing theories’ ability to take account of the complex and multidimensional risks that are created by the company but affect different constituencies both inside and outside it. While the global financial crisis re-ignited the urgency to further define an appropriate legal framework for decision-making in large public firms, there have not been substantial changes in the way this problem is treated in legal and business circles.The paper is grounded on the recognition of the historical quest to find a legitimisation of corporate power and in particular to create a system of public accountability that could justify managerial decision-making. These tasks have become ever more central in the wake of the many scandals that exploded from the early 2000s to the present day, showing that many constituencies can suffer from the externalities of corporate activities. While much has been written on this topic, more recent events illustrate the need to find an alternative approach to the question of the corporate objective. This is because of its centrality in defining legal strategies to control managerial behaviour, but also because of the shortcomings related to the application of existing paradigms. The asserted urgency to find a new theoretical model to govern managerial actions and coordinate them with the interests of different corporate constituencies leads to the proposition of a new theory. The enlightened sovereign control paradigm flows from a pluralistic theoretical foundation and provides a novel framework for the balancing of different interests that are affected by the behaviour of large public corporations.

The Economic Expectations of Investors and Municipal Corporate Constituents on Public Entities: How the Legal Framework Guiding Public Finance Diverges from Current Economic Realities

Although the Great Recession had a tremendous impact on private and corporate wealth, the resulting economic conditions created a number of financing problems for public entities. From municipal bond dilemmas to toxic and costly interest rate swaps, this article attempts to put together a broad, but not exhaustive survey, of the number of ways in which the post-recession economic climate has hurt public entities financial positions. Of particular importance to the author is the disjoint behind how the current legal regime treats municipal corporations, a governmental/corporate entity, as compared to a traditional corporation. This disparate treatment leave municipal corporations, which face the same type of economic demands from bondholders as corporations face from equity and debt holders, with significantly less protections from creditors in times of financial distress or insolvency. After outlining and explaining the problems, the author details how courts and legislatures have attempted to solve the same problems in the private sector and formulates legislative and legal strategies for coping with current realities and preventing future public financing crises.

Overcoming Obstacles to Municipal Fiber Networks

Nineteen million Americans cannot access the Internet from home, and tens of millions more only have slow unreliable access. Meanwhile, nations who once looked at the U.S. as a leader in technological innovation are connecting greater portions of their people to the fastest communications technology on the planet fiber optics. Unfortunately, less than 20% of Americans currently have home access to fiber optic communications. And the private sector has stopped building new fiber networks because investors don’t want to wait for them to pay off. Fortunately, local governments have started to fill the gaps by building fiber networks and providing their communities with world-class broadband Internet access. But cable and telecom industry lobbyists have pushed nineteen states to enact restrictions against municipal broadband provision in order to protect their broadband market dominance. A major force pushing municipal broadband restrictions through state legislatures is the American Legislative Exchange Council (ALEC). Under the pretext of promoting “free markets” and “level playing fields” for its corporate constituents, ALEC drafts model bills for its member legislators to introduce in their respective state capitols. Currently, nineteen states have passed ALEC-inspired laws restricting municipal broadband provision and more are considering the same. This paper will discuss these state laws and analyze their underlying policies. In the process, relevant facts will be presented to challenge the rhetoric surrounding the enactments. The paper concludes with a call for federal preemption of these state laws and a discussion of ways municipalities can navigate the restrictions to proceed with various forms of limited fiber broadband deployment. The timeliness of this research is apparent from the FCC’s recent announcement of a “Gigabit City Challenge,” calling for at least one gigabit-broadband connected community in all fifty states by 2015. The aforementioned municipal broadband restrictions pose a direct threat to this FCC initiative by substantially limiting who can offer the desired services. Another recent event which underscores the timeliness of this research was FCC Chairman Julius Genachowski’s statement on February 15, 2013, about state municipal broadband laws. While the Georgia legislature was deliberating enactment of municipal broadband restrictions, Genachowski released a statement declaring: If a community can’t gain access to broadband services that meet its needs, then it should be able to serve its own residents directly. Proposals that would tie the hands of innovative communities that want to build their own highspeed networks will slow progress to our nation’s broadband goals and will hurt economic development and job creation in those areas. In agreement with Genachowski, I will advocate for federal preemption of state restrictions against municipal broadband and discuss ways for municipalities to circumvent such restrictions in the meantime.