Redefining the corporate purpose in times of galloping value transformation – are corporate law academics lagging behind?
By Anne-Marie Weber-Elżanowska, 9 April 2021
Anne-Marie Weber-Elżanowska is an Assistant Professor at the Faculty of Law and Administration at the University of Warsaw.
The problem of (un)sustainable development has recently pushed the corporate law academic community into a heated debate about the notion of the corporate purpose. This should not come as a surprise: since a sustainable reorientation of the economy boils down to the necessity of transforming economic behaviour patterns and habits, the spotlight must be directed onto corporations as crucial economic actors. Solving the corporate purpose riddle is thus of paramount importance.
The corporate purpose debate: old chestnut or a new challenge?
The notion of the corporate purpose has been a recurring subject of academic discussion for decades. Scholarly contributions produced a large body of research on the so-called stakeholder v. shareholder primacy dilemma, which basically revolves around the question of whose interests (shareholders’ alone, or stakeholders’ as well) should define the corporate purpose. Yet, the debate is often discarded as unsolvable and repetitive as ‘all has been said’. Such an approach misses the debate's crucial factual context. Just a couple of decades ago, the question of whom the corporation should serve was a matter of political or ideological choices and open to scholarly dispute. Today it must be addressed in light of planetary boundaries and social risks. The consequences of the unsustainable path of development the global community is currently on, calls for freeing the corporate purpose debate from the stigma of a perpetual and fruitless academic Gedankenexperiment.
Wouldn’t it be naïve to assume or advocate the immunity of corporate law concepts from transformative changes in our surroundings? The tendency of corporate law scholars to artificially decontextualize the existence of the corporation seems simply untenable. Like humans, corporations and the laws that create and regulate them, need to adapt to environmental and social transformations. Corporations are not detachable from the world they function in.
Did we miss the forest for the trees?
In line with a general growing awareness about sustainability problems in our society, expectations about sustainable behaviour of individual economic actors (humans) are easily formulated and generally accepted. Yet, somehow, the same does not hold for corporate economic actors. Leading academics present complex solutions aiming at a redefinition of the corporate purpose and the facilitation of sustainable business conduct. Still the notion of a corporate purpose defined through the narrow lens of the shareholder wealth maximization model seems to prevail. The current corporate law debate seems stuck. Still, some corporate law academics seem encapsulated in a corporate law framework of assessment. They are distracted from noticing transformative environmental and social changes around them. Perhaps, these changes have already reshaped society’s moral compass? If so, sustainability-driven changes in human values have already overtaken the corporate law academic debate.
The need of a new perspective
The very slow pace in the corporate law-driven debate on the corporate purpose calls for a pragmatic search of novel analytical angles. The settled debate’s frame of reference must be updated. Are there different legal ‘entry points’ through which the sustainability postulate is able to penetrate the corporation? The empirically proven pro-sustainability transformation of values in society (e.g. Eurobarometer Report ‘Attitudes of European citizens towards the Environment’) inspires to focus on external but still private-law-driven impulses which may ‘push the corporation from the outside’ to adopt sustainable corporate conduct.
In my paper, ‘Is it really up to corporate law (and academics) to shape the corporate purpose? Reassessing the impact of societal value transformation’, which I will present at the Daughters of Themis Corporate Purpose Conference I argue that the topic debated by corporate law scholars is at least partially already decided by society. The academic community debates over internal conceptual perspectives on the corporate purpose. Meanwhile, corporations as private-law actors may already be subject to significant constraints in determining their purpose and, simply put – their actions. In order to understand these external factors that curb corporate conduct one has to take a fresh look at time-honoured concepts of private law.
Introducing ‘safety valves’ in European private law
The concept of ‘safety valves’, which can be universally identified across European private law systems, serves as a potent yet so-far neglected angle to reassess the corporate purpose debate. ‘Safety valves’ are mainly introduced through so-called general clauses and refer to the notion of good morals (bones mores). Their purpose is to subject private autonomy to limitations to ensure alignment with morality-driven social norms. The concept of ‘safety valves’ mirrors how legal systems of private law have been dealing with the intersection of morality and private autonomy. Corporations navigate private law systems and are thus subject to these ‘safety valves’, e.g., when entering into an agreement with their supplier. It follows, that a corporation’s autonomy in designing its conduct is fenced-in by morality standards.
I posit that a sustainability-driven transformation of values within society may influence the content of the bonos mores. This has the potential to lead to an externally driven reconceptualization of the corporate purpose. In this way, the concept of sustainability is integrated intothe corporation irrespective of which ‘internal’ (corporate law-driven) model of deciphering the corporate purpose we adopt.
The transformation of values cultivated by society is capable of ‘externally’ inducing sustainability-driven changes to corporate conduct. This can reflexively modify the understanding of the corporate purpose. In other words, corporate boards should consider sustainability issues in structuring their decisions and the resulting corporate conduct. The consequences of failing to do so are not illusionary or solely reputational. Depending on the modalities in which the general clause of good morals is used in respective private law frameworks, there are various practical ‘entry points’. Boards that shape corporate conduct according to an unsustainable notion of the corporate purpose may face trouble in enforcing the corporation’s contracts in court. Based on the general clause of good morals, courts could declare sustainability-infringing contracts as null and void. Activist shareholders may use their rights to challenge (file for annulment) of shareholders’ meetings’ resolutions claiming that they conflict with society’s standards of morality. The violation of a board member’s duty to align corporate decisions with sustainability principles could lead to shareholder class actions claiming damages. Minority-appointed board members could challenge ‘unsustainable’ board resolutions in court.
If the sustainability transformation of values within society reframes the notion of good morals, it delimits the way the corporate purpose and corporate conduct may be shaped by corporate boards. Such conclusion holds regardless of how we conceptualize the corporate purpose from an ‘internal’ corporate law perspective.
Is the corporate law debate redundant?
The change of perspective regarding the corporate purpose debate I propose does not imply that the corporate law-driven discussion is irrelevant. On the contrary, I aim to add fuel to that debate by placing it in a broader context. The empirics suggest that society’s value transformation towards sustainability is a fact. Through the concept of ‘safety-valves’ European private law systems are well equipped to accommodate changes of morality standards. Accordingly, corporate conduct is already subject to sustainability-influenced constraints stemming from private law.
My conclusions stress the urgency of a structured and joint effort finally and effectively to tackle the need for a redefinition of the corporate purpose in corporate law. Since good morals reconceptualise the notion of the corporate purpose ‘externally’, now is the time for corporate scholars to act on it. It is time to stop lagging behind. We should no longer spend time on debating if sustainability ideas remodel the notion of the corporate purpose. Let’s focus on how to translate pro-sustainability value transformation into corporate law.
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