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.

Keywords: corporate law, corporate governance, sustainability, nexus of contracts, team production, shareholder primacy, financialization, disclosure regulation, board diversity, co-determination, fiduciary duty, limited liability, value chains, due diligence

JEL Classification: K22, K31, K32, M14