Backlash Threat: The Grip of Nationalism on Corporate Law

In this article, I document and explain the pervasive influence of nationalist impulses in shaping corporate law around the world and throughout History—a phenomenon which I term “the grip of nationalism on corporate law.” This effort shows that nationalist influence on corporate law is old, widespread, and resilient, and has put sand in the gears of globalization. 

Nationalism—understood as the political resolve to favor territorial insiders over outsiders through protectionist policies—has left an imprint on the most important features of the governance landscape, ranging from ownership structures and takeover defenses, to choice of law and investor protection. The use of corporate law mechanisms to ensure domestic control of business corporations has been particularly salient. France and Germany, for instance, first embraced multi-voting and non-voting stock in the early twentieth century to ward off foreign domination of local companies. A key motive behind state ownership of enterprise in most jurisdictions, from Norway to Brazil, is to ensure domestic control and headquarters of strategic industries. Fears of foreign acquisitions of domestic companies have profoundly shaped takeover legislation worldwide, to the point that numerous legal reforms bear the names of conspicuous foreign bidders, such as the “Danone amendment” in France, the “Lactalis decree” in Italy, and the “Cadbury law” in the United Kingdom.    

We do not usually think of U.S. corporate law as reflecting nationalist concerns, but analogous forces of state-level patriotism (or statism, rather than nationalism) have fundamentally shaped its course. U.S. firms have repeatedly lobbied for and obtained state anti-takeover legislation in response to hostile threats by out-of-state bidders. Nationalist discourse against foreign ownership has also occasionally left a mark on U.S. federal legislation, from the charter provisions disenfranchising foreign investors in the First and Second Bank of the United States in the nineteenth century, to the enactment of regulatory restrictions on hostile takeovers in the Williams Act of 1968. 

At least three factors promote the grip of nationalism on corporate law:  

The political deficit of foreigners. Because only citizens vote, the political economy of corporate governance, as of everything else, is tilted against foreign interests. In the absence of international coordination, lawmakers tend to privilege the interests of domestic managers, controlling shareholders, and workers, over those of foreign investors. 

The powerful alliance of domestic forces. The pursuit of nationalist policies through corporate law benefits from the powerful domestic alliance between, on the one hand, elite and labor interests in retaining local corporate control, and, on the other, the popular appeal of nationalist sentiment. 

The use of corporate law as stealth protectionism. Constitutional commitments to economic integration and international concerns over reciprocity favor the use of corporate law as a form of covert protectionism. Corporate law rules can be protectionist in effect without being discriminatory on their face.

The grip of nationalism on corporate law shows that the conventional accounts about the determinants of corporate governance are unduly narrow. By focusing exclusively on agency costs, efficiency accounts have neglected the other possible ways in which corporate law can affect social welfare: influencing economic integration, national security, local development, etc. At the same time, political accounts have often overlooked the popular appeal of nationalist corporate policies and the interests of broader segments of the population on corporate governance outcomes. The influence of nationalism thus underlines how corporate governance arrangements matter in ways that transcend the concerns about firm-level efficiency and firm-level politics that have dominated the field. 

The strength of nationalist forces also suggests that the usual forecasts about the effects of globalization on corporate law may be flawed. Predictions have exclusively alternated between either the prospect of convergence towards the shareholder-oriented model that better protects outside investors, or the persistence of traditional differences in corporate governance despite the powerful thrust of globalization. Yet the combination of rising foreign ownership with the political deficit of foreigners can lead to a different, but unforeseen, scenario: neither convergence nor persistence, as conventionally assumed, but backlash. Once foreign investors come to dominate local capital markets, as is increasingly the case, there may be greater political pressure towards investor-unfriendly corporate reforms—a trend that I suggest may well be under way.   

Mariana Pargendler is Professor of Law at Fundação Getulio Vargas School of Law in São Paulo, Global Professor of Law at New York University School of Law and a Research Member of the European Corporate Governance Institute (ECGI).