THE RISE OF INTERNATIONAL CORPORATE LAW.

• Author: Pargendler, Mariana

ABSTRACT

Comparative corporate governance has focused either on prevailing differences across legal systems or on spontaneous legal transplants of foreign institutions in response to global competition. This Essay argues that corporate law today is not only a product of the invisible hand of the market but also of the soft (and not-so-soft) hands of international organizations and standard setters. By tracing the emergence of international corporate law (ICL) since the Asian crisis of the late 1990s, it shows how the IMF, the OECD, the World Bank, and the United Nations, among several other international players, have helped shape legal reforms and corporate governance developments around the world. The observed influence of ICL ranges from the impulse for independent directors and the control of related-party transactions to the growth of ESG investment factors and human rights policies.

The rise of ICL responds to interjurisdictional externalities and nationalist bias of domestic regimes that have been largely neglected by prevailing theories, which failed to predict and notice the strong push for international coordination and standard setting in the field. ICL has also gone beyond merely prescribing an Anglo-Saxon model of corporate governance to promote legal innovations that place the United States on the receiving end of international pressure. Legal implants from ICL, rather than legal transplants from a foreign jurisdiction, are an increasingly relevant force behind corporate governance change. While ICL has been influential, its efficacy and normative vision face challenges. The time has come to move beyond an exclusively comparative focus to also scrutinize the potential and limits of corporate lawmaking at the international level.

TABLE OF CONTENTS INTRODUCTION I. DEFINING ICL A. ICL as International Law B. ICL as Corporate Law C. ICL and CCG: From Legal Transplants to Legal Implants D. EU Corporate Law and ICL II. THE RISE OF ICL THROUGH INTERNATIONAL ORGANIZATIONS A. IMF B. OECD C. World Bank D. United Nations III. INTERNATIONAL STANDARD SETTERS IN CORPORATE LAW A. International Organization of Securities Commissions (IOSCO) B. Basel Committee C. Financial Stability Board D. International Agreements IV. THE LIMITS OF ICL A. Undoing Regulatory Diversity B. Democracy and Nation-State Policy Autonomy C. Enforcement Limitations D. Political Capture at the Domestic and International Level E. Deglobalization and the Future of ICL CONCLUSION: A RESEARCH AGENDA FOR ICL INTRODUCTION

What do the emergence of independent directors in South Korea, the legal reforms on related-party transactions in India, and the rise of environmental, social, and governance (ESG) factors in the United States have in common? They all trace back to efforts by international organizations--the International Monetary Fund, the World Bank, and the United Nations, respectively--to shape corporate governance arrangements around the world. The different corporate guidelines and norms produced by international organizations have had a noticeable impact on legal changes across multiple jurisdictions. Yet the literature on comparative corporate governance (CCG) has failed to notice and reflect on the creeping rise of what I term international corporate law (ICL). (1)

Corporate law is one of the main fields of comparative legal inquiry. (2) In sharp contrast to the norm in other areas, many, if not most, prominent corporate law scholars in the United States and beyond have contributed to comparative corporate governance. (3) Politicians also habitually appeal to foreign legal systems when advancing domestic corporate law reforms, as illustrated by the reference to German law in the US bill aiming to mandate employee representation on corporate boards. (4)

While the influence of foreign legal transplants on the evolution of domestic corporate law regimes is longstanding and well known, by the late 1990s a central debate emerged about the possible effects of economic globalization on national corporate arrangements. The "convergence" camp posited that the competitive pressures of global markets would push jurisdictions around the world to converge in the adoption of efficient systems of shareholder protection. (5) The opposing "persistence" camp argued that distinct ownership and political structures would ensure the persistence of national differences despite the pressures of globalization. (6) Both camps relied on a model of competition, with states unilaterally choosing either to maintain their existing corporate governance framework, or to update it toward greater investor protection to improve the position of domestic firms in global markets. (7) In parallel, at least some jurisdictions would also compete in the provision of investor-friendly laws in a global market for incorporations.

The competition paradigm, however, offers an incomplete picture of the forces shaping corporate law over the last few decades. Coordination efforts by international institutions, rather than unilateral moves prompted by competition alone, have played a role in several corporate law developments around the world. (8) Unbeknownst to most observers, the various guidelines and initiatives by international organizations such as the International Monetary Fund (IMF), the World Bank, the Organisation for Economic Co-Operation and Development (OECD), and the United Nations have amounted to a sizable body of ICL. (9) Beyond international organizations proper, transnational institutions and standard-setting bodies such as the International Organization of Securities Commissions (IOSCO), the Basel Committee on Banking Supervision, and the Financial Stability Board have also increasingly influenced corporate governance developments.

Moreover, the emergence of ICL is not only surprising for its international origin and coordinated form, but also for its substance. Both sides of the convergence-persistence debate shared the assumption that concerns about externalities fell outside of corporate law's domain. Yet ICL has sought not only to enhance investor protection (the result predicted by convergence proponents), but also to address various externalities generated by corporate activity, such as systemic risk, environmental harm, and human rights violations (an outcome that was not foreseen).

ICL has not been merely a vehicle for the diffusion of Anglo-Saxon practices, but has become increasingly a source of institutional innovation, including in directions resisted by the United States. Despite strong networks and points of contact, ICL is far from monolithic. Not only are the avenues for influence of ICL on domestic law varied, but there is also some tension between the pro-investor focus promoted by some organizations and the concern for stakeholders fostered by others.

The IMF imposed various corporate law reforms on South Korea, including the requirement of independent directors, as a condition for financial support at the height of the Asian crisis in the late 1990s. (10) In the mid-2010s, India reformed its corporate laws to improve its relative ranking in the World Bank's Doing Business Project, a mechanism of "governance by indicators" that arguably serves both to lure foreign investment and to obtain World Bank funding. (11) By the late 2010s, the corporate governance debate around the world had placed great emphasis on ESG factors--a concept first coined and dutifully promoted by various United Nations initiatives. (12) More generally, jurisdictional competition for corporate law may become increasingly bounded by international lawmaking. (13)

This Essay aims to describe and explain the rise of ICL since the late 1990s in the face of the dominant view that coordinated efforts at harmonization are unnecessary, if not counterproductive. Why, then, do we see ICL at all? While this complex phenomenon is certainly multifaceted and not monocausal, this Essay interprets the emergence of ICL as a solution to two critical problems within corporate law:

Interjurisdictional externalities. Corporate activity can have negative effects on third parties, such as producing systemic risk, environmental harm, and human rights violations. In the orthodox law and economics view, these externalities should be addressed through regulations from legal fields other than corporate law, such as financial regulation, environmental law, labor law, and tort law, among others. (14) However, states may be reluctant to impose regulations on local companies if--as is often the case--the negative effects are largely felt abroad, as this could impact their international competitiveness. Moreover, dedicated regulation from other fields is famously absent in the international arena, thus leading to major regulatory gaps which ICL may seek to fill. (15) ICL could thus help solve a prisoner's dilemma arising from states' temptation to engage in beggar-thy-neighbor policies. Another form of inteijurisdictional externality relates to the potential network benefits of standardization in corporate governance practices and disclosure standards in reducing transaction costs in cross-border transactions. (16)

Political capture by domestic interest groups. Even when the promotion of shareholder protection or the mitigation of externalities are welfare enhancing within a given country, reforms may still not materialize due to the political clout of powerful interest groups, such as controlling shareholders, managers, or labor unions. Moreover, states famously face a problem of time-inconsistency in the protection of foreign investors, initially seeking to attract investors only to renege on early promises once foreigners' investment is sunk. (17) In this context, international law initiatives may weaken the political force of domestic interest groups in defending rent-seeking measures and promote credible commitments to investor protection and other areas of concern for foreign parties.

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