Business history and theory reflect a tension between public and private conceptions of the corporation. This tension and conceptual ambiguity lay close to the surface of The Modern Corporation and Private Property, in which Berle and Means portrayed the modern public corporation as straddling the public/private divide. It is also embodied in the famous Berle-Dodd debate, which provides the basis for contemporary clashes between ‘different visions of corporatism’, such as the conflict between shareholder primacy and stakeholder-centered versions of the corporation.
In my recent Working Paper, ‘Corporations, Directors’ Duties and the Public/Private Divide’, I examine a number of recent developments suggesting that a shift is occurring in this regard. The law and economics ‘nexus of contracts’ theory of the corporation, which emerged in the 1980s, adopted a decidedly private conception of the corporation. Under this theory, which subsequently became the dominant corporate law paradigm in the United States and a number of other jurisdictions, shareholder interests and corporate performance took centre stage. In recent times, however, the pendulum has swung in the opposite direction toward a more public conception of the corporation. This trend is likely to accelerate in light of the massive financial support that governments around the world have provided to corporations during the Covid crisis.
The paper argues that recent financial scandals, such as the Wells Fargo fraudulent accounts scandal in the United States and scandals at some of Australia’s leading banks, have highlighted the fact that there are multiple problems in corporate law, which may come to the forefront at different times. These scandals reveal at least two distinct problems. The first is a legitimate concern about corporate financial performance, given that we now live in an age of ‘forced capitalism’, where, in many jurisdictions, members of the public are involuntary investors in the stock market via mandatory retirement saving schemes. The second problem is the danger that corporate conduct may result in negative externalities and harm to society. This second problem focuses on how profits are made.
One of the consequences of an increasing focus on this second problem of corporate law is greater regulatory attention to the issue of corporate culture. My paper argues that corporate governance techniques designed to address the first problem may exacerbate the second, by creating flawed corporate cultures involving perverse incentives for corporate misconduct.
As my paper discusses, a number of recent developments in corporate law have highlighted the negative externalities and social harm that corporate actions can cause. These developments suggest the emergence of a more cohesive vision of the corporation that encompasses both private and public aspects. They also potentially affect the role and duties of company directors.
My paper provides several insights. The first is that, in spite of the tendency to label corporate law theories as either ‘shareholder-centred’ or ‘stakeholder-centred’, it is a mistake to view the two sides of the Berle-Dodd debate as binary and irreconcilable. Such a position was also rejected in the 2019 Australian Banking Royal Commission Final Report, which stated:
It is not right to treat the interests of shareholders and customers as opposed. Some shareholders may have interests that are opposed to the interests of other shareholders or the interests of customers. But that opposition will almost always be founded in differences between a short-term and longer-term view of prospects and events.
The second insight is that modern corporate governance techniques (such as performance-based pay), which are designed to ameliorate the problem of unsatisfactory corporate performance, can at the same time exacerbate other problems involving the social impact of corporations. Both problems need to be considered when crafting corporate law incentives.
Finally, the paper examines the implications of the pendulum shift toward a more public conception of the corporation for the monitoring role of directors. Since the 1960s, in response to the work of Professor Melvin Eisenberg, independent directors have been viewed as corporate monitors, with a fundamental duty of oversight. However, as another doyen of US corporate law, Professor Victor Brudney, once noted, to describe directors as monitors is not the end of the story—we need to know precisely what it is they are supposed to be monitoring. The paradigm shift toward a more public conception of the corporation that is currently underway in a number of jurisdictions suggests that company directors should no longer be seen merely as monitors of corporate performance but also as monitors of corporate integrity and the risk of social harm.
Jennifer G. Hill is the Bob Baxt AO Professor in Corporate and Commercial Law and the director of the Centre for Commercial Law and Regulatory Studies (CLARS) at the Monash University Faculty of Law, as well as Research Member at the European Corporate Governance Institute.
The Working Paper, ‘Corporations, Directors’ Duties and the Public/Private Divide’, is forthcoming in Firm Governance: The Anatomy of Fiduciary Obligations in Business (Arthur B. Laby and Jacob Hale Russell (eds) (Cambridge University Press).