Faculty of law blogs / UNIVERSITY OF OXFORD

What if Corporate Law Reform was not Timid? Necessary Corporate Reform Beyond ‘Corporate Purpose’ for a Sustainable Planet


Benedict Sheehy
Associate Professor, Canberra Law School, University of Canberra


Time to read

4 Minutes

The great milestones in corporate law reform, like reforms in broader common law (see Allan C. Hutchinson, Evolution and the common law (Cambridge University Press, 2005)), have resulted from a combination of major social changes, innovative thinking and effective political leadership. One can think of Salomon v Salomon & Co Ltd, responding to the burgeoning business failures of the era, which created the independent entity doctrine, the allocation of the right to management decision making to directors as corporate form took over from partnerships, and limits on insider trading as a response to the 1929 Wall Street crash as examples of such major reforms. Each was the result of a combination of those three factors and led to corporate law reforms Cheffins describes as punctuated equilibriums, a type of law reform that is much less common than the evolutionary cyclical pattern, but in certain instances necessary.

In my recent publication, ‘Sustainability, Justice and Corporate Law: Redistributing Corporate Rights and Duties to Meet the Challenge of Sustainability’ I argue that the sustainability crisis we are faced with calls for a major overhaul of the structures and processes of corporate decision-making and provide an innovative model for such reform.

Today, the corporation is increasingly understood as a major social, political and environmental actor, with significant impacts on individual life prospects from employment to consumption patterns, on society through engagement and political influence through lobby groups and even more fundamentally through their development and operation of social media platforms, and of course, through their entrenched involvement in and contribution to the unfolding ecological disaster of climate change.

The traditional response, identified by Michale Klaine and Leo Strine is as follows: ‘corporate law scholars [respond] that these are not corporate law’s problems.… Corporate law accepts that corporations must follow the law, so if the consequences of corporate activity are not socially optimal, then it is not corporate law itself—which simply allocates power between stockholders and corporate management and allows for the creation of artificial citizens—but other bodies of law that bear responsibility.’ Given this basic philosophy of corporate law, it is unsurprising that corporate law reform proposals of today are as timid as they are inadequate.

The only significant contemporary corporate law reform at the corporate-society interface falls under the umbrella of the ‘corporate purpose’ discussion. The driver of this debate is twofold as Cheffins identifies on this  blog that ‘if corporate America does not forsake prioritizing shareholder interests, social and economic stability could be undermined and the fate of the planet could be jeopardized due to climate change’ and ‘a belief that companies can fill a vacuum left by ineffective government’. These beliefs combined with the slow recognition that the corporation is more than a mere economic entity, a mere node in network of the economy provides impetus for the corporate purpose reformers. The basic reform idea is to encourage corporations to entertain social purpose along with profits—some type of adoption of corporate social responsibility in its decision-making. For example, Colin Mayer has argued that corporate purpose statements will somehow address these ills by strengthening shareholder power to hold directors to account and address profitable solutions.

This proposed reform is timid and given the major challenges it must address, it is inadequate. Indeed, Paul Davies argues elsewhere on this blog that it is meaningless. In my article, I argue that such reforms are inadequate because they leave all of the structures and processes that have led to these socially undesirable outcomes in place. That is, the proposed timid reforms do nothing to address the structures and processes of the main corporate organs—the board of directors or the shareholders in a general meeting—that have made the decisions to cause the damage.

If it is acknowledged that the corporation is both the major generator of economic wealth and the major cause of the generation of greenhouse gases, its governance being structured as if it were purely an economic actor is manifestly inappropriate. That is, directors and shareholders exercise voting rights primarily if not exclusively on the basis of economic interests as proposed by the shareholder primacy model is ill-conceived at best. Furthermore, much of the evidence is that shareholders are not particularly interested in exercising these political voting rights.

These insights lead to consideration of what potential reforms might be desirable and what they might look like if they are to address sustainability concerns. Understanding the corporation as a legal structure that facilitates and implements decisions taken by people using political processes, putting assets to use in the pursuit of specific goals, allows consideration of reform on the basis of reconceptualised goals. If those goals are to address the ecological and social sustainability concerns, then people competent and interested in those areas must be given rights and duties with respect to decision-making on those matters in the corporate body.

I propose creating additional bodies for corporate governance. In the model of the European two-tiered board, I propose additional boards: a board with a social ambit focused on stakeholders and one with an environmental ambit. Of course, these will not be easy to manage or make decisions, but that is the norm for any decision-making body including existing corporate boards. Alternatively, board members could be appointed from specific constituencies such as stakeholders or environmentally concerned experts.  A second reform could take advantage of shareholders’ limited interest in exercising political voting rights. A body dedicated to exercising those rights, say a stakeholder which makes decisions through a general meeting of stakeholders.

Are these radical proposals for reform? Perhaps they are, but we are facing radical changes in our social and natural environments, precisely the time for radical reforms. The corporation we have today is the product of more than a millennium of evolution perhaps to the point that its legal persona, shareholder/members and director/governors appears to be sacrosanct. But is this structure so sacrosanct as to be preserved from reform so as to destroy the society which has created it?

Benedict Sheehy is a Professor of Law at Canberra Law School.



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