Corporate Governance Reform and the Sustainability Imperative.

• Author: Bruner, Christopher M.

FEATURE CONTENTS INTRODUCTION 1220 I. CORPORATE THEORY AND THE LANGUAGE OF REFORM 1229 A. Prevailing Theories of Corporate Law 1229 1. Shareholder Primacy: Shareholder Power and Shareholder Purpose 1229 2. Nexus of Contracts: Board Power and Shareholder Purpose 1231 3. Team Production: Board Power and Stakeholder Purpose 1233 4. The Incompleteness of Prevailing Theories 1234 B. Broader Possibilities 1237 II. CORPORATE SUSTAINABILITY AND THE CORPORATE FORM 1241 A. Excessive Risk-Taking and Cost Externalization 1241 B. Conceptualizing Sustainability 1247 C. Re-envisioning the Corporate Form and Corporate Law 1250 III. TOWARD SUSTAINABLE CORPORATE GOVERNANCE 1253 A. Disclosure-Based Strategies 1253 B. Restructuring the Board 1259 1. Diversity in the Boardroom 1259 2. Workers and Corporate Governance 1262 C. Liability and Risk Incentives 1266 1. Financial Firms 1267 2. Real-Economy Firms 1270 CONCLUSION 1275 INTRODUCTION

Recent years have witnessed a significant upsurge of interest in alternatives to shareholder-centric corporate governance. In 2019, the Business Roundtable, an association of CEOs at prominent U.S. companies, issued a new "Statement on the Purpose of a Corporation," to which 181 members signed on. (1) The document expressed "a fundamental commitment to all of our stakeholders," including customers, employees, suppliers, "the communities in which we work," and--presumably not least, but last on the list--"shareholders, who provide the capital that allows companies to invest, grow and innovate." (2) Emphasizing that "[e]ach of our stakeholders is essential," the signatories "commit to deliver value to all of them." (3) While this rejection of an exclusive focus on shareholders was not uniformly welcomed across the investment community (4) and has prompted considerable academic debate, (5) signatories included leaders of some of the largest asset managers in the world--notably, BlackRock's Larry Fink and Vanguard's Tim Buckley, (6) whose firms manage $9 trillion and $7 trillion in assets, respectively. (7) Fink has been particularly outspoken on the topic, concluding in his 2020 letter to CEOs that "a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders." (8)

It is tempting to minimize such developments as yet another swing of the corporate governance pendulum, driven in part by a shift in the broader political economy. The managerialism and stakeholder-centric perspective of the postwar decades, for example, had much to do with the political and economic circumstances of the times, including large public companies' status as Cold War champions of capitalism, and the combined capacity for business leaders, a robust labor movement, and the government itself to function as effective coordinating agents in a period of balanced and growing prosperity. (9) This approach gave way, after the rise of the law-and-economics movement in the 1970s, to the strongform shareholder centrism that now prevails. (10) However, the shift toward stakeholderism that we witness today may signal a more enduring shift due to the unique nature of the underlying impetus for reform. Contemporary calls for corporate governance reform are driven by a growing sustainability imperative--increasingly widespread recognition that business as usual, despite the short-term value generated, could undermine social and economic stability and perhaps even threaten our long-term survival if we fail to grapple with associated costs. (11)

While discourse on sustainability remains as susceptible to charged rhetoric as any domain of public policy, (12) the sustainability imperative has become impossible to dismiss as mere hyperbole due to the range of complex and interconnected environmental, social, and economic crises that we face. The International Panel on Climate Change estimates that we are "more likely than not" to see global warming of 1.5[degrees]C above preindustrial levels by 2040, threatening a range of dire environmental consequences and attendant social and economic risks, and concludes that it is now "unequivocal that human influence has warmed the atmosphere, ocean and land." (13) An interdisciplinary team of scientists has sought to define Earth's "planetary boundaries," quantifying what the planet can bear in various respects, and has concluded that several of the identified boundaries have already been exceeded--including climate change and biosphere integrity, which function as "core" boundaries establishing "planetarylevel overarching systems." (14) Some estimates suggest that it would require 1.7 Earths to sustain the global population's rate of resource use, and that this figure would balloon to five Earths if everyone consumed resources at the rate the U.S. population does. (15)

Meanwhile, although the worldwide rate of extreme poverty has fallen over recent decades--due principally to the economic rise of China and India (16)--staggering inequalities persist, (17) and the United States has hardly been immune. Income has grown dramatically for the wealthy yet stagnated for most of the U.S. population, and "40% of Americans are living so close to the edge that they cannot absorb an unexpected $400 expense." (18) Extraordinary concentrations of wealth and resulting inequalities impede further poverty reduction and more generally undermine social stability in developed and developing economies alike. (19) These challenges have only intensified following the onset of the COVID-19 pandemic. (20)

Businesses and capital markets have contributed significantly to these crises. (21) Business entities are among the world's most significant economic actors, growing in number at an extraordinary rate (22) and sometimes rivaling even the largest countries in their economic magnitude and power. (23) Their operations significantly impact all dimensions of sustainability. (24) The transportation, industrial, and commercial sectors are among the principal emitters of greenhouse gases, contributing to global warming. (25) Economic inequalities, too, have been exacerbated in recent decades by the redistribution of corporate gains from labor to capital. That redistribution has been fueled in the United States by growing shareholder power and activism, which have increasingly pressured companies "to cut labor costs, resulting in wage reductions within firms and the 'Assuring' of the workplace." (26) Although such crises cannot be attributed entirely to big business, it is nevertheless "hard to imagine any solution to these problems that does not entail a change in corporate behavior." (27)

Many scholars have argued that sustainability is best pursued through extracorporate regulation such as environmental and labor laws, leaving corporate governance itself to focus exclusively on shareholders. (28) But the inadequacies of this reactive approach are increasingly apparent. As Sarah Light observes, "managers make decisions with profound environmental consequences long before pollution comes out of a pipe or smokestack as an externality," and greater attention to "fields governing corporate decisionmaking and market architecture can yield solutions to enduring problems that traditional federal environmental law has been unable to solve on its own." (29) Notably, this includes "cumulative harms like climate change" that "sit uneasily within the traditional paradigm of environmental law, which tends to focus on controlling, reducing, or reporting significant amounts of pollution" but lacks effective tools to promote changes in harmful day-to-day business practices that produce large-scale aggregate effects over time. (30)

As a practical matter, there is further reason to doubt that extracorporate regulation alone could possibly constrain such politically powerful actors. (31) Even those favoring shareholder-centric corporate governance have conceded that major corporations' ability to neutralize external regulations may effectively undermine attempts to force businesses to internalize the environmental and social costs associated with their activities. (32) It is thus critical to assess how decisionmaking incentives take shape in the first place, and how governance reforms might render corporate decision-making more sustainable. (33)

Growing awareness of the sustainability imperative has driven the recent shift away from shareholder-centric corporate governance. The Business Roundtable statement, for example, cites the importance of "embracing sustainable practices across our businesses." (34) Fink's letter likewise states that "sustainable investing is the strongest foundation for client portfolios" and that a "company's prospects for growth are inextricable from its ability to operate sustainably." (35) However, prevailing theoretical lenses on corporate governance effectively cabin the terms of the debate in ways that obscure many of the most consequential reform options. In its response to the Business Roundtable statemerit, for example, the Council of Institutional Investors objects that the statement "work[s] to diminish shareholder rights" while "proposing no new mechanisms to create board and management accountability to any other stakeholder group." (36) This exchange reflects the quandary we face when seeldng to apply the familiar terminology and conceptual frameworks of traditional corporate governance discourse to the novel sustainability imperative. Options for reform are seemingly limited to recalibrating board-versus-shareholder power, and shareholder-versus-stakeholder purpose. (37)

Meanwhile, even for those more receptive to a broader conception of corporate purpose, the range of conceivable reforms appears limited to tweaked versions of existing capital-market mechanisms. Fink, for example, narrowly conceptualizes climate change as an "investment risk" and advocates for expanded corporate disclosures to permit investors to bring this to bear...