The Quest for Legitimacy: A Public Law Blueprint for Corporate Governance

Abstract

Corporations are assuming an unexpected role: social reformers. As investors, employees, and other stakeholders increasingly call on companies to “take a stand” on controversial social issues, managers are struggling to respond. Faced with climate change, racial equity, and workplace gender issues, managers can no longer stay above the fray and retreat into the rhetoric of profit maximization. Corporate responses are frequently garnering backlash from stakeholders, as progressives accuse firms of hypocrisy and “greenwashing,” and conservatives warn that a “woke” elite is imposing its values on the public. Corporate governance scholarship, unsure of how to address these new pressures, remains stymied in a standoff between stakeholderism and shareholder primacy.

Corporate law’s fiduciary duty model provides little guidance to firms on how to navigate these social issues. Instead, this Article argues that reactions against managers’ choices, portrayed as arbitrary, unrepresentative, and biased, are akin to the “legitimacy challenges” often mounted against government officials and regulatory agencies. To enhance the legitimacy of agency decisions, administrative law has honed a sophisticated toolkit to promote goals such as transparency, accountability, consultation, and reason-giving.

This Article reveals previously unnoticed parallels between administrative and corporate law to improve corporate decision-making on social issues. We argue that corporate law should expand beyond its fiduciary duties approach to embrace legitimacy-enhancing governance tools based on the public law blueprint. We examine connections between administrative and corporate law through real world illustrations from climate change, #MeToo, and Black Lives Matter. Firms that adopted governance tools inspired by the public law blueprint reshaped their decisions and gained better acceptance from stakeholders. But when firms failed to embrace these tools, they experienced adverse reactions from investors and stakeholders alike, often losing firm value.

This Article has a clear normative payoff. These governance tools should become standard corporate governance practice. Embracing this public law blueprint will improve relations with stakeholders, reduce the possibility of costly legitimacy challenges, and improve firm value in a manner appealing to both stakeholderism and shareholder primacy proponents.

Keywords: ESG, stakeholders, administrative law, corporations, fiduciary duties, corporate purpose

JEL Classification: K22, K23