Corporate Governance Reform and the Sustainability Imperative
abstract. Recent years have witnessed a significant upsurge of interest in alternatives to shareholder-centric corporate governance, driven by a growing sustainability imperative—widespread recognition that business as usual, despite the short-term returns generated, could undermine social and economic stability and even threaten our long-term survival if we fail to grapple with associated costs. We remain poorly positioned to assess corporate governance reform options, however, because prevailing theoretical lenses effectively cabin the terms of the debate in ways that obscure many of the most consequential possibilities. According to prevailing frameworks, our options essentially amount to board-versus-shareholder power, and shareholder-versus-stakeholder purpose. This narrow perspective obscures more fundamental corporate dynamics and potential reforms that might alter the incentives giving rise to corporate excesses in the first place.
This Feature argues that promoting sustainable corporate governance will require reforming fundamental features of the corporation that incentivize excessive risk-taking and externalization of costs, and presents an alternative approach more conducive to meaningful reform. The Feature first reviews prevailing conceptions of the corporation and corporate law to analyze how they collectively frame corporate governance debates. It then presents a more capacious and flexible framework for understanding the corporate form and evaluating how corporate governance might be reformed, analyzing the features of the corporate form that strongly incentivize risk-taking and externalization of costs, discussing the concept of sustainability and its implications for corporate governance, and assessing how the corporate form and corporate law might be re-envisioned to produce better results.
The remainder of the Feature uses this framework to evaluate the proposals garnering the most attention today, and to direct attention toward the broader landscape of reforms that become visible through this wider conceptual lens. Recent reform initiatives typically rely heavily on disclosure, which may be an essential predicate to meaningful reform, yet too often is treated as a substitute for it. The Feature then assesses more ambitious reform initiatives that re-envision the board of directors, and rethink underlying incentive structures—including by imposing liability on shareholders themselves, in limited and targeted ways, to curb socially harmful risk-taking while preserving socially valuable efficiencies of the corporate form. The Feature concludes that until we scrutinize the fundamental attributes of the corporate form and the decision-making incentives they produce by reference to long-term sustainability, effective responses to the interconnected environmental, social, and economic crises we face today will continue to elude us
author. Stembler Family Distinguished Professor in Business Law, University of Georgia School of Law. For helpful comments and suggestions, thanks to Afra Afsharipour, Martin Gelter, Virginia Harper Ho, Andrew Johnston, Marc Moore, Beate Sjåfjell, D. Daniel Sokol, and the editors of the Yale Law Journal, particularly Joseph Simmons. Thanks also to Sydney Hamer, Amanda Milner, Sean O’Donovan, and Jacob Weber for helpful research assistance.
Recent years have witnessed a significant upsurge of interest in alternatives to shareholder-centric corporate governance. In 2019, the Business Roundtable, an association of CEOs at prominent U.S. companies, issued a new “Statement on the Purpose of a Corporation,” to which 181 members signed on.1 The document expressed “a fundamental commitment to all of our stakeholders,” including customers, employees, suppliers, “the communities in which we work,” and—presumably not least, but last on the list—“shareholders, who provide the capital that allows companies to invest, grow and innovate.”2 Emphasizing that “[e]ach of our stakeholders is essential,” the signatories “commit to deliver value to all of them.”3 While this rejection of an exclusive focus on shareholders was not uniformly welcomed across the investment community4 and has prompted considerable academic debate,5 signatories included leaders of some of the largest asset managers in the world—notably, BlackRock’s Larry Fink and Vanguard’s Tim Buckley,6 whose firms manage $9 trillion and $7 trillion in assets, respectively.7 Fink has been particularly outspoken on the topic, concluding in his 2020 letter to CEOs that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.”8
It is tempting to minimize such developments as yet another swing of the corporate governance pendulum, driven in part by a shift in the broader political economy. The managerialism and stakeholder-centric perspective of the postwar decades, for example, had much to do with the political and economic circumstances of the times, including large public companies’ status as Cold War champions of capitalism, and the combined capacity for business leaders, a robust labor movement, and the government itself to function as effective coordinating agents in a period of balanced and growing prosperity.9 This approach gave way, after the rise of the law-and-economics movement in the 1970s, to the strong-form shareholder centrism that now prevails.10 However, the shift toward stakeholderism that we witness today may signal a more enduring shift due to the unique nature of the underlying impetus for reform. Contemporary calls for corporate governance reform are driven by a growing sustainability imperative—increasingly widespread recognition that business as usual, despite the short-term value generated, could undermine social and economic stability and perhaps even threaten our long-term survival if we fail to grapple with associated costs.11
While discourse on sustainability remains as susceptible to charged rhetoric as any domain of public policy,12 the sustainability imperative has become impossible to dismiss as mere hyperbole due to the range of complex and interconnected environmental, social, and economic crises that we face. The International Panel on Climate Change estimates that we are “more likely than not” to see global warming of 1.5°C above preindustrial levels by 2040, threatening a range of dire environmental consequences and attendant social and economic risks, and concludes that it is now “unequivocal that human influence has warmed the atmosphere, ocean and land.”13 An interdisciplinary team of scientists has sought to define Earth’s “planetary boundaries,” quantifying what the planet can bear in various respects, and has concluded that several of the identified boundaries have already been exceeded—including climate change and biosphere integrity, which function as “core” boundaries establishing “planetary-level overarching systems.”14 Some estimates suggest that it would require 1.7 Earths to sustain the global population’s rate of resource use, and that this figure would balloon to five Earths if everyone consumed resources at the rate the U.S. population does.15
Meanwhile, although the worldwide rate of extreme poverty has fallen over recent decades—due principally to the economic rise of China and India16—staggering inequalities persist,17 and the United States has hardly been immune. Income has grown dramatically for the wealthy yet stagnated for most of the U.S. population, and “40% of Americans are living so close to the edge that they cannot absorb an unexpected $400 expense.”18 Extraordinary concentrations of wealth and resulting inequalities impede further poverty reduction and more generally undermine social stability in developed and developing economies alike.19 These challenges have only intensified following the onset of the COVID-19 pandemic.20
Businesses and capital markets have contributed significantly
to these crises.21 Business entities are among the world’s
most significant economic actors, growing in number at an extraordinary rate22 and sometimes rivaling even
the largest countries in their economic magnitude and power.23 Their operations
significantly impact all dimensions of sustainability.24 The transportation,
industrial, and commercial sectors are among the principal emitters of
greenhouse gases, contributing to global
warming.25 Economic inequalities, too, have been exacerbated in recent decades by the redistribution of corporate gains from labor to capital. That redistribution has been fueled in the United States by growing shareholder power and activism, which have increasingly pressured companies “to cut labor costs, resulting in wage reductions within firms and the ‘fissuring’ of the workplace.”26 Although such crises cannot be attributed entirely to big business, it is nevertheless “hard to imagine any solution to these problems that does not entail a change in corporate behavior.”27
Many scholars have argued that sustainability is best pursued through extracorporate regulation such as environmental and labor laws, leaving corporate governance itself to focus exclusively on shareholders.28 But the inadequacies of this reactive approach are increasingly apparent. As Sarah Light observes, “managers make decisions with profound environmental consequences long before pollution comes out of a pipe or smokestack as an externality,” and greater attention to “fields governing corporate decision-making and market architecture can yield solutions to enduring problems that traditional federal environmental law has been unable to solve on its own.”29 Notably, this includes “cumulative harms like climate change” that “sit uneasily within the traditional paradigm of environmental law, which tends to focus on controlling, reducing, or reporting significant amounts of pollution” but lacks effective tools to promote changes in harmful day-to-day business practices that produce large-scale aggregate effects over time.30
As a practical matter, there is further reason to doubt that extracorporate regulation alone could possibly constrain such politically powerful actors.31 Even those favoring shareholder-centric corporate governance have conceded that major corporations’ ability to neutralize external regulations may effectively undermine attempts to force businesses to internalize the environmental and social costs associated with their activities.32 It is thus critical to assess how decision-making incentives take shape in the first place, and how governance reforms might render corporate decision-making more sustainable.33
Growing awareness of the sustainability imperative has driven the recent shift away from shareholder-centric corporate governance. The Business Roundtable statement, for example, cites the importance of “embracing sustainable practices across our businesses.”34 Fink’s letter likewise states that “sustainable investing is the strongest foundation for client portfolios” and that a “company’s prospects for growth are inextricable from its ability to operate sustainably.”35 However, prevailing theoretical lenses on corporate governance effectively cabin the terms of the debate in ways that obscure many of the most consequential reform options. In its response to the Business Roundtable statement, for example, the Council of Institutional Investors objects that the statement “work[s] to diminish shareholder rights” while “proposing no new mechanisms to create board and management accountability to any other stakeholder group.”36 This exchange reflects the quandary we face when seeking to apply the familiar terminology and conceptual frameworks of traditional corporate governance discourse to the novel sustainability imperative. Options for reform are seemingly limited to recalibrating board-versus-shareholder power, and shareholder-versus-stakeholder purpose.37
Meanwhile, even for those more receptive to a broader conception of corporate purpose, the range of conceivable reforms appears limited to tweaked versions of existing capital-market mechanisms. Fink, for example, narrowly conceptualizes climate change as an “investment risk” and advocates for expanded corporate disclosures to permit investors to bring this to bear upon their investment decisions, predicting that “companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital.”38 This approach takes for granted the sufficiency of such mechanisms for redirecting major corporations toward long-term sustainable operations.39 Although renewed scrutiny of shareholder-centric corporate governance is a welcome development, such initiatives are ill-equipped to promote corporate sustainability because they remain tethered to a conception of the corporate form that obscures the nature of the underlying problem. Core features of the corporate form, as presently conceived, are simply unsustainable—environmentally, socially, and economically.40 Promoting sustainable corporate governance will require reforming features of the corporation that incentivize excessive risk-taking and externalization of costs onto society.
This Feature interrogates the conceptual binaries that structure the accepted framework of corporate governance and surfaces more fundamental corporate dynamics giving rise to corporate excesses in the first place. To set the stage, Part I canvasses prevailing conceptions of the corporation and corporate law—specifically, shareholder-primacy theory, nexus-of-contracts theory, and team production theory. The aim is not to provide a comprehensive account of their strengths and weaknesses, but rather to analyze how they collectively frame corporate governance debates. These theories generally focus exclusively on two conceptual binaries: board-versus-shareholder power, and shareholder-versus-stakeholder purpose. Accordingly, reform efforts conditioned by these theories tend to hold constant the underlying features of the corporate form and associated capital-market structures, and so fail to grapple with the fundamental forces that drive risk-taking and cost externalization.
We should instead focus on fundamental drivers of corporate risk-taking and externalization of environmental, social, and economic costs, and ask how we can alter decision makers’ incentives so as to steer corporate conduct in a more sustainable direction. Rather than asking which corporate constituency’s existing incentives represent the least-bad proxy for larger social goals, we should explore how to adjust their incentives to promote sustainable modes of corporate governance. Accordingly, in Part II, I present a more capacious and flexible framework for understanding the corporate form and evaluating corporate governance reform proposals. I analyze the features of the corporate form that strongly incentivize risk-taking and externalization of costs onto society, discuss the concept of sustainability and its implications for corporate governance, and assess how the corporate form and corporate law might be re-envisioned to produce better results.
In Part III, I use this framework to critically evaluate the proposals garnering the most attention today, and to direct attention toward the broader landscape of reforms that become visible through this wider conceptual lens. Recent reform initiatives typically employ disclosure-based strategies, which create the impression of regulatory action, but remain unlikely to substantially improve matters on their own. Disclosure initiatives do not directly require corporate actors to change anything about how they currently operate; do not alter the incentives of shareholders, the predominant audience, making it unlikely that investor pressures would lead managers to reform corporate decision-making in any fundamental way; and are often limited by reference to financial materiality, a narrow concept that is hardly coextensive with society’s goals. Although such initiatives might support more robust reform, they too often substitute for it, and are unlikely to produce sufficient change on their own.
More ambitious initiatives that take direct aim at board structure—notably, by improving board diversity, and by involving labor in corporate decision-making—have real potential to promote greater social and economic sustainability. Environmental sustainability remains another matter, however, as the Volkswagen emissions scandal illustrates. Although the German automaker has long had a codetermined board giving labor substantial representation, the company pursued a strategy of relentless growth that encouraged harmful, and thoroughly unsustainable, business practices.41 Simply put, employees can have bad incentives too—a reality suggesting that, as important as reforming board structure may be in advancing social and economic sustainability, it remains an incomplete response to the broader sustainability imperative.
Reforms taking direct aim at underlying incentive structures merit real attention. Notably, proposals for imposing varying degrees of liability on shareholders themselves, in limited and targeted ways, can be fine-tuned to curb socially harmful risk-taking in particular financial and economic contexts, while preserving socially valuable efficiencies of the corporate form. Likewise, in the context of global value chains—where widespread human-rights abuses and environmental harms have been committed by subsidiaries and suppliers of consumer-facing companies headquartered in more affluent jurisdictions—reforms are emerging that could sharpen the incentives of corporate parents and contractual “lead firms” to monitor more effectively, to disclose what they find, and to take meaningful action to prevent or remediate such harms.42
These analyses suggest that there is in fact no single calibration of the corporate form that will promote optimal levels of risk-taking in all financial and economic contexts. Rather, differing business realities and risk profiles will require more granular assessment by industry, and the optimal liability structures and risk incentives in various settings likely will not be identical. Most critical at this stage is that we begin to ask the right questions, with an eye toward the corporate form’s flexible capacities, in order to identify more sustainable governance reforms than those presently garnering substantial attention. Until we begin to scrutinize the fundamental attributes of the corporate form and the decision-making incentives they produce with reference to long-term sustainability, effective responses to the interconnected crises we face today will continue to elude us.