Prosocial Corporate Purposes, Corporate Governance Regimes, and Varieties of Capitalism: A Primer

How do different corporate governance regimes attract financiers, talents, and clients with particular attention to social, ethical, and environmental concerns? How do different varieties of capitalism contribute to fostering prosocial corporate purposes? In a recent paper (forthcoming in the Research Handbook on Competition and Corporate Law edited by Florence Thépot and Anna Tzanaki, available here), I offer a theoretical perspective on how different corporate governance regimes and varieties of capitalism can be associated with prosocial corporate purposes.

There is strong evidence that consumers’ expressed sentiments about environmentally and ethically sustainable products translate into actual spending behaviour. For instance, in a joint study from McKinsey and NielsenIQ (McKinsey & Company, 2023) that examines sales growth for products which claim to be environmentally responsible, more than 60 percent of respondents noted that they would pay more for a product with sustainable packaging. Similarly, shareholders are becoming more vocal about social and ethical concerns, and they are using their power to influence corporate choices. A growing number of shareholder resolutions are focused on addressing issues such as climate change and human rights (see Ethos Foundation’s activities, such as a resolution in Glencore AGM). Moreover, in recent years, ESG metrics have become more prominent in investment analysis, as investors seek to identify companies that are well-positioned to navigate and benefit from, a changing social and environmental landscape, in that, in 2021, assets under management in ESG funds reached a record $35.3 trillion (Global Sustainable Investment Alliance). Lastly, not only consumers and investors but also workers place a high value on social responsibility, and they are increasingly seeking employment opportunities at companies that demonstrate a commitment to making a positive impact. According to a 2022 survey by Deloitte, 37% of Gen Zs and 36% of Millennials have rejected a job, based on their personal ethics (including issues related to societal and environmental impact). This is particularly true among Gen Zs and Millennials in leadership positions (46%).

These examples demonstrate that investors, consumers, workers (including leadership positions), and shareholders are increasingly interested in salient social issues such as pollution, climate change, human rights, and demographic change (see also Elhauge 2005, Hart and Zingales 2017, Roe 2021, Barzuza 2023). As firms compete in capital, human capital, and product markets, my paper explores how firms exploit corporate governance structures to attract financiers, talents, and clients with particular attention to social, ethical, and environmental concerns. More clearly, my paper examines the interplay of economic agents’ (eg, shareholders, investors, workers, consumers, managers) prosocial preferences, the invisible hand, ie, the competition in markets of capital, labour and products, and the visible hand, ie, hierarchical structure of corporate governance regimes, to realign private corporate purposes with social objectives, addressing and supporting prosocial corporate purposes.

My paper starts from the two main types, or varieties, of capitalism that are identified in the literature (see, among others: Hall & Soskice 2001; Thelen 2012; Roe & Vatiero 2018; in Vatiero 2017, the terms ‘armed capitalism’ and ‘disarmed capitalism’ are coined):

1. The disarmed capitalism of Anglo-Saxon countries is characterised by large public companies with low concentration/power of shareholders, low voice/power of workers, and by markets of products with low barriers to entry.
2. The armed capitalism of European continental countries is instead characterised by large public companies having high concentration/power of shareholders, high voice/power of workers, and by markets of products with high barriers to entry.

Which of these two types is expected to contribute more to fostering prosocial corporate purposes? The paper offers a theoretical perspective on how different varieties of capitalism lead (or do not lead) to prosocial objectives.

On the one hand, large public corporations in disarmed capitalism may promote prosocial objectives because:

• Large public corporations in this type of capitalism are characterized by minority shareholders who may be concerned about ethical, social, and environmental issues, ie, they are seeking to maximise shareholder welfare (including social and ethical concerns) instead of market (ie, share) value (see Hart & Zingales 2017).
• Moreover, these corporations are more exposed to the forces of competition, including pressures from ethical, social, and environmental investors and consumers (as well as workers), pushing these corporations to adopt prosocial objectives.

However, arguments against this type of capitalism can also be advanced. Large public corporations in disarmed capitalism may not pursue prosocial objectives because:

• Minority shareholders may only be concerned about profits (Friedman’s doctrine, see Friedman 1970).
• Moreover, the high level of competition in the product market, which characterises disarmed capitalism, may leave no room to deviate from market value maximisation (Elhauge 2015; Roe 2021).

On the other hand, large public corporations in armed capitalism may pursue prosocial objectives because:

• The controlling shareholder or blockholder (for instance, a family, a bank, or a state) that characterises the corporate governance of that type of capitalism may be concerned about ethical, social, and environmental issues, pushing managers to follow prosocial objectives.
• Moreover, the relatively strong voice and power of workers in this type of capitalism may support prosocial objectives (cf. Tirole 2001; Thelen 2012).
• Finally, barriers to entry and oligopolistic rents in this type of capitalism may provide leeway to prioritise prosocial objectives over market value maximisation (Roe 2021).

Arguments against armed capitalism pursuing such objectives include:

• Controlling shareholders may only be concerned about profits.
• In addition, workers may prefer groups’ objectives, such as job stability or higher wage rates, over reducing social costs, such as limiting pollution.
• Finally, the discretion of managers, which could support the interests of all stakeholders, including the local community and workers (see Blair & Stout 1999; Elhauge 2005), is limited by controlling shareholders, thus discouraging prosocial corporate objectives.

In conclusion, the aim of my paper is to provide arguments for both the pros and cons of how different types of capitalism support (or do not support) prosocial corporate purposes.

Massimiliano Vatiero is an Assistant Professor of Political Economy at the Department of Economics and Management (DEM) of the University of Trento (Italy) and is the ‘Brenno Galli’ Chair of Law and Economics at the Law Institute (IDUSI) of the Università della Svizzera Italiana, Switzerland.

The author's paper can be accessed here.

References

Blair Margaret M. & Lynn A. Stout (1999), ‘A team production theory of corporate law’, 85(2) Virginia Law Review, 247.

Friedman Milton (1970), The social responsibility of business is to increase its profits, New York Times.

Hall Peter A. & David Soskice (2001), An introduction to varieties of capitalism, in Peter A. Hall & David Soskice (eds.), Varieties of capitalism: The institutional foundations of comparative advantage (Oxford University Press), 1-68.

Hart Oliver & Luigi Zingales (2017), ‘Companies Should Maximise Shareholder Welfare Not Market Value’ 2(2) Journal of Law, Finance, and Accounting, 247.

Roe Mark J. (2021), ‘Corporate purpose and corporate competition’ ECGI Law Working paper n. 601/2021.

Roe Mark J. & Massimiliano Vatiero (2018), ‘Corporate governance and its political economy,’ in Jeffrey Gordon & Wolf-Georg Ringe (eds.), Oxford handbook of corporate law and governance (Oxford University Press), 56–83.

Thelen Kathleen (2012), ‘Varieties of capitalism: Trajectories of liberalization and the new politics of social solidarity,’ 15(1) Annual Review of Political Science, 137.

Tirole Jean (2001), ‘Corporate governance’ 69(1) ECONOMETRICA, 1.

Vatiero Massimiliano (2017), ‘On the (political) origin of “corporate governance” species’ 31(2) Journal of Economic Surveys, 393.

Vatiero Massimiliano (forthcoming), ‘Varieties of capitalism, competition, and prosocial corporate purposes,’ in Florence Thépot and Anna Tzanaki (eds.), Research Handbook on Competition and Corporate Law (Edward Elgar Publishing).