(Re)defining Corporate Solvency for Sustainability

Abstract

This article is a think piece that examines how the solvency of a corporation could be measured in an integrated way by adopting a standard that encompasses the corporation’s financial capital as well as its natural capital and human capital. As most corporations operate in the intersection of all three forms of capital, a healthy situation of all three forms is a prerequisite for a corporation’s success. It seems coherent that only when all three forms of capital are maintained in an adequate way, it is to be concluded that the corporation is solvent and fit for the future. We therefore propose to adopt an integrated corporate capital solvency standard and argue that only when all three forms of capital are in good shape, the corporation can distribute excess funds to its shareholders. Our arguments stem from the observation that corporate capital maintenance laws of five mainstream Western jurisdictions lack a duty to uphold a corporation’s natural capital as well as human capital. Facing the triple threats of climate change, depleting ecosystems, and the global health pandemic, we contend that such a traditional approach does not back corporate boards in adopting and implementing a sustainable and circular business model for their corporations’ business activities. Applying an integrated corporate capital solvency standard implies that all three forms of capital are to be included in the corporate balance sheet. This aligns with the development in the last decade of corporate integrated reporting. Such an integrated standard would create a duty for corporate boards of directors to effectively sustain not only the corporation’s financial capital but also its natural and human capital. Ultimately, it will support boards with successfully implementing the corporation’s sustainability strategy.

Keywords: Solvency, insolvency, natural capital, social capital, corporate law, integrating reporting