Questions of corporate power have permeated corporate law scholarship for a long time. They have historically informed broader political discussions on the extent to which the concentration of private economic power should be subject to the constraints of democratic control. Some of these concerns became embedded in the problematisation of the corporate objective, traditionally focused on determining how different interests are represented in the process of corporate decision-making. As it is the case with a number of legal (and in fact policy) issues, the task of balancing different corporate interests has remained an elusive one. It seemed in fact that over the past twenty years, the cyclical sequence of corporate scandals and financial crises could not shift the narrative away from the orthodoxy of shareholder value. In a nutshell, this asserts the prioritisation of the private interest of corporate members, ahead of all other stakeholders (such as employees, creditors, consumers, but also the environment and society).
With the unfolding of the post-GFC years, and with the belief in shareholder value unsurprisingly unscathed by post-crisis regulation, part of my scholarship turned to this long-standing dilemma. In particular, I was interested in finding legal and institutional mechanisms that could be employed to align corporate interests with societal ones. Given the apparent inevitability of corporate power in modern societies, I focused on ensuring some form of democratic legitimacy behind the process of corporate decision-making.
My ideas on this topic flowed into an article that was published in 2018 in the Brooklyn Journal of Corporate, Financial and Commercial Law (Vol.12, Issue 2, 241–278), and that was centred on the proposition of a model of corporate decision-making, which I termed Enlightened Sovereign Control (ESC, the seeds of which lied in a concept developed earlier in my doctoral studies). This idea did not receive much traction then, despite coming after governments in the UK and the US had effectively nationalised some of their largest banks in order to guarantee the survival of the financial system.
The global spread of Covid-19 over the past three months may present a more compelling case for the application of a model of sovereign control. Lockdown measures followed the pandemic, and this created an unprecedented economic slowdown whereby businesses across industries have become reliant on government support for their survival (ie airlines and transport franchises). At the same time, other business sectors have found themselves in a privileged position, as the only providers of what under the circumstances are essential social services (ie supermarkets and pharmacies). In both cases, a ‘business as usual’ approach is not going to be an option. If governments will bail out large swathes of the economy, this time around state shareholding will have to be used in a way that effectively steers decision-making, aligning those companies towards socially accepted goals. In the case of essential social services too, the government will have to intervene in order to prevent abuses and ensure that those services or products are received fairly by all those in need (think about big pharma).
If government intervention seems inevitable in the post-coronavirus age, how is this going to be effected? Under what legal and institutional mechanisms? This is where my paper comes useful and my construction can be adapted to the situation.
For the purpose of this discussion, I am not going to expand on the underlying question on the shortcomings of shareholder value—there is plenty of that in my article. Once we accept that shareholder value can no longer inform corporate decision-making, especially after government bailouts, the task is to design a mechanism of public control, which is what I termed ‘sovereign control’. The concept of ESC generates from the belief that social and welfare interests should be embedded among the goals of those corporations whose activities invest a wide range of constituencies. The attendant necessity to balance economic entrepreneurial interests and social concerns pushes towards a sensible (enlightened) intervention of the state (sovereign) as the ultimate guardian of social interests (control).
The characteristic feature of the ESC is thus the involvement of the state in balancing different interests that emerge within large public corporations. Under this proposition, the state has an effective role in shaping the corporate objective. It does so through procedural mechanisms and a different composition of the board of directors which would be complemented with the direct inclusion of state professionals. Boards of directors have traditionally been regarded as the utmost manifestation of private economic power, as engines of entrepreneurial activities, and ultimately corporate power. This power today is at odds with the rather limited level of accountability that directors have, especially vis-à-vis constituencies other than shareholders. My proposition is that this power should be brought within some degree of democratic dimension, which would in turn provide society with an indirect accountability link.
Under the ESC the state is envisaged as the natural custodian of different societal interests by virtue of its democratic underpinning, which places it in the best position to attain regulatory goals in the public interest. The caveat with this proposition is that the inclusion of a public interest goal in corporate decision-making requires the deployment of state professionals that at the moment simply do not exist. That is why the ESC is premised on the setting up of a permanent, state-based institutional/regulatory body. This institutional design moves the scope of the discussion from corporate law and governance towards institutional economics. The proposed institutional design and the related mechanisms of public accountability detailed in the paper contribute towards an effective balancing of different interests that arise in boards’ decision-making. In particular, the proposed body’s institutional design (namely its at-arm’s-length relationship with the state) would make it independent from both government and market forces, thus insulating it from some of the regulatory failures that have traditionally hindered independent committees and regulatory agencies.
Another caveat is that not all corporate entities in the post-Covid-19 business scenario will fall under sovereign control. Governments around the world will be called upon the task of discerning which businesses require (and warrant) bailouts, and which industries demand closer scrutiny. Circumstances may vary across markets and jurisdictions. Within the ESC, state intervention is premised on a two-tier classification that facilitates the identification of those corporate entities whose activities raise social concerns. A tier-1 classification (substantiating sovereign control) is determined under the ESC upon five criteria, which are: 1) size and number of employees at group level; 2) group turnover; 3) geographical spread of the business; 4) range and nature of business activities; 5) sum of externalities on social groups.
When I wrote about it, the ESC was primarily conceived as a legal and institutional mechanism to address the question of the corporate objective and mitigate problems of corporate power. Today there is a more compelling urgency, which is associated with the uncertainty over the post-Covid-19 economic environment. In that new world, it is unthinkable that the state should simply bail out private firms, while maintaining a passive stance over how those businesses are run—that would once again lead to a dystopian scenario where ‘you socialize the losses and privatize the gains’. Instead, there is an opportunity to supplement the truncated rationality of market actors and direct resources towards socially beneficial goals. The ESC could serve as a blueprint to achieve these ambitious goals.
Vincenzo Bavoso is a Senior Lecturer in Commercial Law at the University of Manchester.