The definition of corporate purpose has been a subject of discussion since as far back as the 1930s, when Adolf Berle and Merrick Dodd (two of the seminal thinkers about the proper purpose of the public corporation) debated the issue in the Harvard Law Review. Berle argued for what is now referred to as “shareholder primacy”; Dodd advanced the view of the corporation as an “economic institution that has a social service as well as a profit-making function.”
By 1954 Berle had conceded Dodd’s argument that management accountability needs to come from regulators, customers and others in public sphere, but as is so often the case, the law is a lagging indicator. While U.S. jurisprudence still favours shareholder primacy, the Supreme Court of Canada has clearly articulated a stakeholder-primacy view.
Meanwhile, the expectations of the public (and those of many large institutional investors whose ownership interests cut across the entire equity market) are rapidly shifting to a focus on systemic stewardship — demanding a commitment to the preservation of the fundamental social and environmental systems that underpin the potency of the corporation as an engine of wealth creation. This view acknowledges the interdependence between investors, employees, management and other stakeholders and governments in a world where multiple purposes are the norm. The role of the corporation in society and its performance and sustainability are dependent on the larger systems in which it is embedded.
Corporate law is a barrier to enabling a focus on system-level effects insofar as it is singularly focused on the individual firm. Even in a stakeholder-primacy paradigm, the statutory duties of directors suggest that when directors consider and mediate the interests of various stakeholders, they do so in the context of “the best interests of the corporation.” Perversely, given the variety of other interests that arise, the complexity of the stakeholder approach may encourage a narrower “single firm” focus.
Can corporate law catch up, let alone a lead this paradigm shift? Yes and no.
Under Canadian corporate law the oppression remedy, which lets a “complainant” sue for breach of duties or other actions that unfairly disregard its interests, could become a powerful tool for reform. The difficulty is that while the scope of potential complainants is unlimited (subject to the discretion of the courts), our corporate-law statutes suggest that the harm complained of must be suffered by a security-holder, creditor, director or officer of the corporation.
As the Supreme Court of Canada noted in its BCE decision (which confirmed stakeholder primacy) this result is illogical: the universe of those with a remedy when treated unfairly should coincide with the broad definition of those potentially eligible to assert a claim. Correcting this drafting error, whether by amending legislation or judicial activism, will give a broader range of stakeholders a meaningful remedy with which to discipline corporate conduct in order to better ensure sustainability and growth.
Likewise, the legal concept of materiality under securities law is rapidly redefining the line where sustainability issues become public-disclosure obligations. Convergence on, and the mandating of, sustainability reporting and assurance standards will facilitate the development of powerful new tools for monitoring and measuring (and imposing legal discipline on the disclosure of) system-level effects. This should accelerate a shift in focus to the ability of corporations (and other organizations) to generate and account for positive externalities, and to mitigate negative ones.
In recent decades most public corporations have focused on sustainability and inclusiveness by changing products, production and human capital processes and value chains. Yet direct governmental regulation will also be required to deal with the systemic instability, inequalities and externalities inherent in market economies — and not just for publicly traded firms but for other business entities (including private companies and investment managers). For example, regulation will almost certainly be required to reduce the risk of competitive responses that would negate the benefits of actions by individual companies, such as a change in industry composition from public to private companies.
A combination of these three approaches could dramatically accelerate firms more effectively focusing on reducing systemic risks, for the benefit of all, in a manner that supports sustainable financial performance.
We need to think differently about how firms and stakeholders interact and produce sustainable results by restoring the connectivity within systems. Change is always challenging but think of how far we’ve already come in shifting from a shareholder to stakeholder-primacy focus. It’s time to take the next step and put some more of the pieces together!
Edward Waitzer is a lawyer and chair emeritus at Osgoode Hall Law School and the Schulich School of Business