The “stock corporation”–or “company limited by shares”–was designed largely to allow a business to connect to the financial system and financial investors to profit from real economy business. In a paper I recently authored, “Conceiving Corporate Governance for an Asian Environment,” I argue that this design should be adjusted to suit use in the real environment of Asia.
The company form meets the needs of the financial system very well. The financial system’s core requirements of liquidity, controlled volatility and manageable risk for investments are served by the company’s basic characteristics: transferable shares provide liquidity, corporate personality with limited liability reduces volatility of a company’s value, and the rules of corporate governance are designed to make risk manageable, placing great stress on protecting minority shareholders (who are financial investors) and creditors.
Systems other than the financial are not made welcome within the corporate form. Corporate law understands the company as a collection of otherwise unrelated individuals, qua investor, united for the purpose of profit. It generally recognizes the value systems that may be using the corporate form only to the minimal extent necessary to check and punish conflicts of interests, assess compliance with duties or determine whether dominant behavior is unfair to market investors. While protection of the company’s market value takes a position of prominence, values that a family might find important–such as firm autonomy, longevity or culture–are not taken into formal consideration. Corporate law retains this focus even for firms that do not solicit investment from the financial markets.
I argue that this is unfortunate, and should be corrected, particularly in light of data that shows that most corporations are vehicles used by a separate value system or social network, whether that is a family, a state or a political party. By some estimates, family firms constitute the majority of corporations globally. In China, the largest firms are owned by the state and their executive management is controlled by the communist party. In the West, there are increasing calls for corporations to bring principles of corporate social responsibility or social sustainability within their operational aims. Although governance rules have been adopted to communicate such ethical aims to investors and to allow directors to take the interests of certain constituencies into account, corporate law remains in its basic design unhospitable to an overlapping system.
I use institutional and systems theory tools to develop a model of corporate governance dynamics that takes real account of the systems that coexist with corporate law in the company vehicle, focusing initially on the examples of the family and the political party in Asian companies. The concept of “structural couplings” is borrowed from Niklas Luhmann to isolate concepts through which environmental value systems can meaningfully communicate with corporate law. Such couplings already exist for limited use, such as when a court evaluates a director’s compliance with the duty of care by drawing from a coherent body of professional principles formulated outside corporate law (from, e.g., tax management, accounting or finance) and are also found in the concept of “equitable consideration,” which is capable of triggering an action for unfair prejudice under UK-tradition company law. Family or other extra-legal networks of trust constitute such equitable considerations, and courts enforce the relationships they define. Corporate duties of directors and shareholders should be modified to allow alternative systems to be integrated into corporate law.
My paper begins this project with Asia because family and government firms are prominent in Asia. Moreover, corporate law in Asia was transplanted from the West and Asian jurisdictions may be more willing to grasp the need for adjustment in light of diverging histories and cultures. In addition, China should find a mechanism for the orderly accommodation of state aims in corporate law because of the number of large firms it now controls through communist party personnel appointments and the awkward (if not deceptive) way this is currently achieved under corporate law.
The project of recognizing the real environment should not stop with Asia. A next step is to show that the structurally embedded dedication of corporate law to the needs of the financial system should be tempered in favour of the actual relational and cultural needs of persons using the corporate form.
David C. Donald is a Professor at the Faculty of Law of The Chinese University of Hong Kong