The Pluralist Foundations of Corporate Law and Governance

For the past several decades, jurists have invested significant efforts in developing the law in general—and private law in particular—in terms of pluralism (Mak, 2020; Grundmann, Micklitz, and Renner, 2021). However, the conceptualization of corporate law in terms of pluralist notions rarely exists. I aim to fill this void in a recent essay published in the Canadian Journal of Law and Jurisprudence. I distinguish between the plurality of corporate law’s sources, values, and principles, and discuss the implications for governance. I consider private ordering a prominent example of corporate law’s sources’ pluralism because it allows shareholders to design governance mechanisms that differ from the standardized default rules (Fisch, 2018) and supplements the formal state system of corporate law. By enabling the existence of non-state governance regimes, countries acknowledge the notion that numerous systems of law govern the conduct of business organizations, and regulation is an enterprise shared by public and private actors. While private ordering mechanisms represent an essential aspect of pluralism, they do not capture the plurality of values embodied in mandatory governance rules that are solely a product of state law and are not voluntarily chosen by corporate organs.

I argue that the plurality of corporate law’s values could be developed by the social complex systems framework inspired by chaos theory in the natural sciences (Goergen, Mallin, Mitleton-Kelly, Al-Hawamdeh, and Chiu, 2010). The first formulation of systems theory in social science is associated with the work of Talcott Parsons (1902-1979), who developed a sociological systems theory whereby social systems are related either to the internal environment of other social systems or external, non-social environments. Parsons’ systems theory maintains that each system encompasses several elements that make the system a functional whole. This idea was further developed by Walter F. Buckley (1921-2006), who formulated the notion of a complex adaptive system. These systems are diverse and composed of multiple, interconnected elements that can change and learn from experience. Organizations are complex systems—in the sense that they are made of interactive, adaptive agents, groups, and departments—that communicate with one another through feedback mechanisms. Since the complexity framework provides theoretical grounds for skepticism about uniform governance policies applicable in all contexts, courts must analyze the elements of corporate governance that interact with each other to achieve a comprehensive perception of the field.

Therefore, I argue that, in conditions of complexity, corporate governance ecosystems should be designed with a firm-specific view. To do so, I distinguish between internal and external corporate governance arrangements. Internal corporate governance regimes refer to structures regulating the specific power relations between the controlling and minority shareholders or between shareholders and management. External corporate governance regimes regulate the relationship between the company as a separate and independent legal entity and third parties outside the formal firm’s boundaries. The complexity of the corporate governance ecosystem is evident in the constant interactions between individual governance regimes, which produce extensive plurality in the values and principles that corporate law must accomplish. For the law to attain wide-ranging values, it must deny the idea of a ‘one-size-fits-all’ approach that undermines corporate law’s ability to meet the challenge of complexity.

I propose a firm-specific approach that calls on courts to craft tailor-made laws by incorporating the effect of shareholders’ heterogeneity, the heterogeneity of the firm’s internal power relations, and the heterogeneity of industries and markets. While courts should acknowledge the unique features of companies, industries, and markets in creating governance regimes, they should refrain from producing fully customized governance arrangements, implying that corporate law might be considered completely chaotic. I show how internal and external corporate governance regimes should be designed following a firm-specific view by focusing on fundamental legal doctrines—such as fiduciary duties of controlling shareholders, regulation of related party transactions, the officers’ duty of care, and the corporate purpose. By creating a broader set of corporate governance regimes, courts can address variations among shareholders, transactions, corporations, and unique market-based concerns and produce an ‘optimal standardization’ of corporate law (Merrill and Smith, 2000). Consequently, the model I present in the essay suggests shifting the attention from the common law of corporations toward laws pertaining to individual companies.

Leon Anidjar is Assistant Professor in Business Law at IE Law School, Madrid.