Corporate purpose beyond borders: A key to saving our planet or colonialism repackaged?

9 February 2024

Corporate purpose beyond borders: A key to saving our planet or colonialism repackaged?

Singapore Management University, Yong Pung How School of Law
Research Member
Singapore Management University, Yong Pung How School of Law
Nazarbayev University
Contributor
Nazarbayev University

ECGI Categories : Purpose

9 February 2024

Corporate purpose beyond borders: A key to saving our planet or colonialism repackaged?

Authors :
Singapore Management University, Yong Pung How School of Law
Research Member
Singapore Management University, Yong Pung How School of Law
Nazarbayev University
Contributor
Nazarbayev University
Keywords :

The “corporate purpose” debate has captured the attention of academics, lawyers, policymakers, and entrepreneurs around the world. Leading corporate governance scholars see it as one of the “hottest public policy issues” of our time. Governments have embraced legislation to make corporations more purposeful and financial titans have pledged over 100 trillion dollars under their management to foster a broader conception of corporate purpose globally. The realization that climate change is likely the issue of the century and that any chance of successfully addressing it will require a change in the way corporations are governed, seems to justify the attention that the corporate purpose debate is receiving. And yet, the corporate purpose debate, while extremely important, has largely been built on an understanding of corporate law and governance that is local – jurisdiction bound – while the issue of climate change is global; pollution does not respect jurisdictional borders.  

This myopic, jurisdictionally bound, conception of corporate purpose forms the logical foundation for Milton Friedman’s (in)famous 1970s New York Times article “The Social Responsibility of Business Is to Increase Its Profits”. In Friedman’s jurisdictionally bound world, local elections and each country’s democratic process are the linchpins holding together his theory that policy decisions related to social responsibility should be left to governments – not the management of companies – justifying his core argument that the focus of companies should be maximizing shareholder value.  The idea that externalities, such as pollution, may cross jurisdictional borders and that, in turn, those impacted by extraterritorial externalities would not be part of the democratic process, was not contemplated in Friedman’s seminal article – a fact that those who both love and loath Friedman’s article have almost entirely overlooked.

Friedman’s domestic, jurisdictionally bound, understanding of corporate purpose is not an aberration in the leading academic discourse on corporate purpose – it is the norm. The Anatomy of Corporate Law, which is widely considered to be the world’s leading comparative corporate law treatise, frames its discussion of corporate purpose around “local communities” and the interests of “society”. The primary tension in the corporate purpose debate among legal academics – whether to protect non-shareholder stakeholders inside or outside the corporate law – presupposes that the company in question is within the jurisdiction of the government making this policy decision. This illustrates how the extraterritorial effects of companies, and the formal and informal legal mechanisms used to manage those effects extraterritorially, have almost entirely escaped the current academic understanding of corporate purpose.   

However, many of today’s pressing environmental and societal issues, including climate change, are  clearly global. As a result, a panoply of informal and formal legal mechanisms has been produced by states, multinational firms, and transnational organizations that aim to shape corporate purpose beyond jurisdictional borders. Collectively, these mechanisms have created the “globalization of corporate purpose”, raising myriad possibilities for effectively addressing global issues, the most prominent of which is climate change. However, the globalization of corporate purpose is not unambiguously a force for good. When powerful-states, powerful-firms, and powerful-organizations define corporate purpose beyond borders it risks corporate purpose being defined in the interest of these powerbrokers, to the detriment of less powerful communities around the world.  

Our recent ECGI Working Paper – Corporate Purpose Beyond Borders: A Key to Saving Our Planet or Colonialism Repackaged? – creates a taxonomy to understand and analyze the forces driving corporate purpose beyond borders. Our taxonomy identifies the three major drivers of the globalization of corporate purpose – states, multinational firms, and transnational organizations. We demonstrate how these three actors use formal and informal, corporate and non-corporate legal mechanisms to shape corporate purpose beyond borders and how the future of corporate purpose will be significantly influenced by powerful-states, powerful-firms, and powerful-organizations beyond jurisdictional borders.

The realization that corporate purpose is increasingly determined beyond borders raises a myriad of important issues that escape the classic corporate purpose debate. Is the EU’s aggressive use of its sizable market and regulatory power (state-based) to force companies to focus on environmental and social issues unrelated to corporate value going to help save our planet or is it colonialism repackaged? Is the enormous economic power and geographical presence wielded by multinational firms (firm-based), such as IKEA/BlackRock, to promote sustainability globally through their supply-chains/investments a key to addressing climate change or a recipe for greenwashing on a global scale? Are initiatives to promote sustainable corporate governance globally by transnational organizations (organization-based), such as the UN, IMF, OECD and World Bank, a geopolitical remedy to mitigate climate change or an example of geopolitical capture to promote the interests of the Global North at the expense of the Global South?   

As we illustrate in our article, there are no easy answers to these questions. However, what is clear is that the world has changed. The EU’s recent sustainability initiatives (i.e., the EU Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, and the EU Carbon Border Adjustment Mechanism) are an unprecedented attempt to create a regulatory architecture designed to shift the purpose of companies around the world to promote the EU’s conception of sustainable corporate governance globally. In today’s world, Western dominated multinational firms wield enormous economic power and increasingly claim to use that power to promote sustainable corporate governance around the world. International organizations, which have defined the post-World War II era, have come to see the promotion of ostensibly global corporate governance standards as a significant part of their mission – with sustainability, arguably as defined by the Global North, as their new aim.  Friedman’s world, in which corporate purpose was assumed to solely be determined within jurisdictional borders, if it ever existed at all, is now dead.

This new world in which states, firms, and transnational organizations drive the evolution of corporate purpose beyond borders is rapidly changing and replete with complexity. California’s democratic governor recently signed three pieces of legislation (The Climate Corporate Data Accountability Act (SB253), The Climate-Related Financial Risk Act (SB261), and the Voluntary Carbon Market Disclosures Act (AB-1305)), to address climate change – and which aim to change director’s considerations and the behavior of corporations prompting a shift in corporate purpose beyond California’s borders. However, as we explain in our article, distinct from the EU’s globally focused sustainability initiatives, California’s legislation is designed primarily with a focus on US companies and is far less ambitious than the EU’s initiatives in pushing companies to shift their purpose towards stakeholderism on the  shareholderism-stakeholderism continuum. The meteoric rise of China’s economic power and of its state-controlled firms, provides China with the ability to promote sustainable corporate governance beyond its borders. However, as we explain in our article, China has chosen not to use this power – which may be seen by its supporters as exemplative of its respect for state sovereignty or by its detractors as facilitating a global race to the bottom for corporate governance sustainability standards for its own gain. To add to the complexity, a loss of confidence in the international organizations that have dominated the post-World War II era (the UN, World Bank, OECD, and IMF) and the rise of new organizations like BRICS+, suggest that the ability of international organizations to drive corporate purpose beyond borders to promote sustainability will be less uniform and more regional than in the past. Finally, multinational companies and multijurisdictional investors possess enormous resources and capacity to drive sustainable corporate purpose globally. However, they also may contribute to greenwashing on a global scale and might be influenced by their home states’ political and economic agendas.

In such a complex and rapidly changing environment, it would be unwise to predict whether the colossal implications of the rise of corporate purpose beyond borders will provide a path to sustainable development for all or colonialism repackaged. However, what is clear is that the classic corporate purpose debate is fatally myopic as Friedman’s jurisdictionally bound world no longer exists. Thus, to understand the future of corporate purpose, corporate governance, and sustainability, we must now understand corporate purpose beyond borders.

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By Roza Nurgozhayeva, Assistant Professor of Law, Graduate School of Business, Nazarbayev University & Dan W. Puchniak, Professor, Yong Pung How School of Law, Singapore Management University and ECGI Research Member

This post was first published in the Harvard Law School Corporate Governance Forum

If you would like to read further articles on Corporate Purpose, click here

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