Abstract
Traditionally, the academic literature on corporate law and governance has cabined problems of externalities—unpriced economic effects on nonconsenting third parties—to other legal domains, such as tort law and employment law. However, the most critical private-ordering mechanisms of corporate governance, including executive compensation and takeover discipline, depend critically on market prices, which may be incomplete if externalities are present. The central argument of this chapter is that many corporate social responsibility efforts and ESG investments are in fact best understood as private-ordering responses to the information and incentive problems arising from corporate externality problems. Because externalities are ordinarily unpriced in market transactions, social enterprises that consider externalities in their decision-making face unique institutional challenges: information costs, coordination costs, and other transaction costs. Legal, institutional, and private-ordering developments are already advancing to meet these challenges. The chapter argues that an area ripe for future research is institutional and legal design that minimises information, transaction, and agency costs for coalitions of stockholders with similar preferences that seek to coordinate corporate production around non-financial objectives.
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Notes
- 1.
Armour et al. (2017), p. 23.
- 2.
Jensen (2001), p. 305.
- 3.
See generally Ostrom (1990).
- 4.
- 5.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). See also eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010); Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (Mich. 1919).
- 6.
Jensen (2001), p. 302.
- 7.
Hansmann (1988), pp. 273 et seqq.
- 8.
Bainbridge (2023), p. 138.
- 9.
- 10.
Jensen (2001), p. 298, Bainbridge (2023), p. 135.
- 11.
Rock (2021a), p. 367.
- 12.
Cornes and Sandler (1986).
- 13.
Id.
- 14.
Coase (1960).
- 15.
Cornes and Sandler (1986).
- 16.
- 17.
Larry Fink, 2019 Letter to CEOs: Purpose and Profit, https://www.blackrock.com/corporate/investor-relations/2019-larry-fink-ceo-letter.
- 18.
Hart and Zingales (2017).
- 19.
United Nations Human Rights Office of the High Commissioner (2021), Guiding Principles on Business and Human Rights, https://www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf.
- 20.
Principles for Responsible Investment, https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment.
- 21.
Scott Hirst et al., How Much Do Investors Care About Social Responsibility? ECGI Law Working Paper No. 674/2023 (Jan. 2023), p. 4.
- 22.
Jean-Francois Bonnefon, Augustin Landier, Parinitha Sastry and David Thesmar, Do Investors Care about Corporate Externalities? Experimental Evidence (Working Paper, TSE, MIT and HEC, 2019), p. 5.
- 23.
Oliver Hart, David Thesmar, and Luigi Zingales, Private Sanctions (ECGI Finance Working Paper No. 866/2023, 2023), pp. 2 et seq.
- 24.
Pershing Square Holdings, Pershing Square Holdings, Ltd. 2020 Annual Report, 12–14 (2020).
- 25.
Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014).
- 26.
Id.
- 27.
Bosch, Bosch Builds Community, https://www.bosch.us/our-company/social-responsibility/
- 28.
The Bosch Constitution, https://www.bosch-stiftung.de/en/bosch-constitution.
- 29.
Carlsberg Group Frequently Asked Questions, Shares and Bonds https://www.carlsberggroup.com/investor-relations/investor-home/faq/#Governance.
- 30.
Patagonia Works, Patagonia’s Next Chapter: Earth Is Now Our Only Stockholder, https://www.patagoniaworks.com/press/2022/9/14/patagonias-next-chapter-earth-is-now-our-only-stockholder.
- 31.
Id.
- 32.
Id.
- 33.
See generally Edmans (2020).
- 34.
Edmans (2023), p. 3.
- 35.
Business Roundtable, Statement on the Purpose of a Corporation, https://system.businessroundtable.org/app/uploads/sites/5/2023/02/WSJ_BRT_POC_Ad.pdf.
- 36.
Id.
- 37.
Larry Fink, 2019 Letter to CEOs: Purpose and Profit, https://www.blackrock.com/corporate/investor-relations/2019-larry-fink-ceo-letter.
- 38.
Larry Fink, 2019 Letter to CEOs: The Power of Capitalism, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.
- 39.
Nikitha Sattiraju, “Elliott Puts More Stress on ESG”, The Deal (Sept. 28, 2020), available at https://www.thedeal.com/activism/elliott-puts-more-stress-on-esg/.
- 40.
Edmans (2011), p. 621.
- 41.
Baruch Lev, Intangibles (working paper, 2018), p. 3.
- 42.
Akerlof and Yellen (1990), p. 255.
- 43.
Shleifer & Summers (1988).
- 44.
Oliver Hart, David Thesmar, & Luigi Zingales, Private Sanctions (ECGI Finance Working Paper No. 866/2023, 2023), pp. 2 et seq.
- 45.
Edmans (2012).
- 46.
Crouzet et al. (2022), p. 30.
- 47.
Bainbridge (2023), pp. 141 et seqq.; Jensen (2001), pp. 310 et seqq.
- 48.
Arrow (1969).
- 49.
For a leading account of governance arrangements that address externality and public goods problems outside of the corporate context, see Ostrom (1990).
- 50.
Hansmann (1988), pp. 273 et seq.
- 51.
Shapiro and Stiglitz (1984).
- 52.
Hansmann and Kraakman (2001), p. 439.
- 53.
- 54.
- 55.
See generally Fisch and Davidoff Solomon (2021).
- 56.
See generally Winston (2018).
- 57.
Employee Benefits Security Administration, Department of Labor, Prudence and Loyalty in Selecting Plan Investments and Exercising Stockholder Rights, 87 Fed. Reg. 73,822 (2023).
- 58.
Michael B. Dorff et al. (2021), p. 147.
- 59.
Eldar (2020).
- 60.
Eldar (2017).
- 61.
See e.g., Bebchuk L, Tallarita R (2022), The Perils and Questionable Promise of ESG-Based Compensation (working paper).
- 62.
Curtis et al. (2021), p. 393.
- 63.
Coffee (2021).
- 64.
Coffee (1984), p. 722.
- 65.
Gold and Miller (2018).
- 66.
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
- 67.
Rock (2021b).
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Acknowledgements
The research underlying this chapter benefited greatly from the support of Notre Dame Law School and the helpful comments of participants at the Lucerne Conference on Law and Economics and the Brigham Young University Winter Deals Conference. Silvio Pantoja provided excellent research assistance.
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Corrigan, P.M. (2024). The Institutional Turn in Corporate Governance Towards Addressing Corporate Externalities and Public Goods. In: Mathis, K., Tor, A. (eds) Law and Economics of Justice. ILEC 2023. Economic Analysis of Law in European Legal Scholarship, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-031-56822-0_4
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