The Fight for Legitimacy in Corporate Governance

61 Pages Posted: 6 May 2022 Last revised: 4 Aug 2022

See all articles by Stavros Gadinis

Stavros Gadinis

University of California, Berkeley - School of Law

Christopher Havasy

Harvard Law School; Harvard University, Department of Government

Date Written: April 11, 2022

Abstract

Corporate managers are increasingly cast in an unexpected role: social reformer. Investors, employees, and other stakeholders are calling on companies to “take a stand” on controversial social issues and managers are struggling to respond. Retreating into the neutrality of profit maximization to try to avoid the fray are no longer viable options. But while corporate initiatives are garnering enthusiasm from some, they are sparking a wave of recriminations from others. Progressives accuse companies of “greenwashing” and not going far enough; conservatives warn that a “woke” and unelected elite is imposing its unpopular values on the public. Ultimately, both critics on the left and right are asking whether managers should be making such important social decisions.

This phenomenon, we argue in this Article, amounts to a legitimacy challenge against managerial authority, arise once the far-reaching societal implications of corporate choices are laid bare to stakeholders. But corporate law’s fiduciary duty doctrine has largely focused on weeding out managers’ self-serving behavior, which neither provides helpful guidance to managers as social leaders, nor does much to gain stakeholders’ trust. Thankfully, other institutions have developed mechanisms to improve the legitimacy of their decisions on controversial social issues – administrative agencies. For decades, administrative law has honed a sophisticated toolkit of mechanisms for boosting the legitimacy of agency decisions. We reveal heretofore unnoticed parallels between administrative law and corporate governance to show how corporate leaders can adjust these administrative tools to improve their legitimacy with stakeholders.

We identify corporate governance equivalents to well-known legitimating devices employed by administrative agencies and explore how they can produce similar legitimating effects for managers. In doing so, we also examine legitimacy challenges on the ground by providing real world illustrations of our argument. We show that in responding to climate change, #MeToo, and Black Lives Matter, many corporations gained better acceptance from stakeholders when they implemented these tools to establish their legitimacy. But when companies strayed too far from the legitimacy toolkit, they often experienced backlash from stakeholder groups, including investors and employees.

Our argument has a clear normative payoff. The legitimacy-enhancing tools we identify should become standard corporate governance practice during managerial decision-making on business issues with far-reaching social implications. Systematically embracing our proposed tools will improve relations with stakeholders, reduce the likelihood of costly legitimacy challenges, and improve firm value in a manner appealing to proponents of both stakeholderism and shareholder primacy.

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

JEL Classification: K22, K23

Suggested Citation

Gadinis, Stavros and Havasy, Christopher, The Fight for Legitimacy in Corporate Governance (April 11, 2022). Available at SSRN: https://ssrn.com/abstract=4081543 or http://dx.doi.org/10.2139/ssrn.4081543

Stavros Gadinis (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

Christopher Havasy

Harvard Law School ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Harvard University, Department of Government ( email )

Cambridge, MA
United States

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