Growing calls for ‘responsible capitalism’ serve as a reminder that corporate governance is not static; nor is it exclusively a private law problem about misalignment of interests between shareholders and managers.
The term, ‘responsible capitalism’, inevitably signifies different things to different people. To some, it is an oxymoron. Karl Marx, for example, viewed worker exploitation as an indelible feature of capitalism. For others, ‘responsible capitalism’ means profit-making without breaching society’s rules. Milton Friedman came close to this interpretation, when he famously stated that ‘There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud’.
A burgeoning understanding of the meaning of ‘responsible capitalism’, however, considers that it involves something more than the mere avoidance of deception or fraud in the pursuit of profit-making. Just over 30 years ago, Professor Phillip I. Blumberg noted that much of the historical debate surrounding corporate personality in the United States had centred on the issue of the rights accorded to corporations, particularly constitutional rights. Questions of this kind have by no means disappeared—one only needs to think of the well-known 2014 Hobby Lobby decision, in which the U.S. Supreme Court determined that business corporations constitute ‘persons’ with a right to claim a statutory religious exemption. Nonetheless, according to Professor Blumberg, the new frontier of modern corporate law and governance would not be about rights, but rather about corporate responsibilities and about how to ensure accountability for corporate actions.
These epithets present the corporation as a social actor with responsibilities to the community
It seems that we have now reached that envisaged frontier and it is reflected in the concept of ‘responsible capitalism’. ‘Responsible capitalism’ is, of course, not the only epithet to express this shift from corporate rights to responsibilities. It intersects and overlaps with a range of other terms, such as ‘corporate social responsibility (CSR)’; ‘environmental, social and governance (ESG)’; ‘corporate culture’; ‘corporate purpose’; ‘stakeholderism’; and ‘corporate reputation’, to name just a few that can be readily found in today’s corporate governance ether. These terms (‘responsible capitalism’ included) suggest a different conception of the corporation to the paradigm which inspired Milton Friedman’s famous edict and which has underpinned U.S. corporate law over the last four decades. Rather than, à la Friedman doctrine, viewing the corporation as a private enterprise with responsibilities primarily to its shareholders, these epithets present the corporation as a social actor with responsibilities to the community. Nowhere is this theoretical u-turn more apparent than in the 2021 Final Report of the British Academy’s Future of the Corporation project. Indeed, the project itself constituted a review of the role of business ‘in society’. The Final Report envisages a greater public role for business (and, by implication, corporations), by defining the purpose of business as ‘creating profitable solutions for problems of people and planet, and not profiting from creating problems’.
This is by no means the first time in legal history that corporations have been perceived as playing a significant public role. After all, from at least the 17th century, U.K. royal chartered corporations, which provided the foundation for U.S. corporate law, had quasi-public roots and were seen as bodies approved by the State to act in the national interest. By the time that Berle and Means published their classic corporate law treatise in 1932, the authors regarded the corporation as a profoundly ambiguous body, which could be interpreted as falling under public or private law. And during the early 1970s, a period of great political upheaval and environmental concern, members of the Rockefeller Foundation’s board of trustees considered that American corporations ‘must assert an unprecedented order of leadership in helping to solve the social problems of our time’.
Incentives designed to address problems of corporate performance can exacerbate harm to stakeholders or society as a whole
Yet, from the 1980s onward, the dominant legal paradigm of the corporation has been the ‘nexus of contracts’ model. This paradigm, which depicts the corporation as a complex network of voluntary bargains between resource holders, placed the corporation firmly within the realm of private law. Under this theory, shareholder interests and corporate performance took centre stage, and the central problem of corporate law was perceived to be the misalignment of interests between shareholders and corporate managers. Acceptance of this paradigm resulted in an outpouring of academic literature, designed to address this fundamental misalignment of interest, in diverse areas, such as takeovers, boards of directors and executive compensation.
Growing calls for ‘responsible capitalism’ serve as a reminder that corporate governance is not static; nor is it exclusively a private law problem about misalignment of interests between shareholders and managers. A second problem is the danger that corporate conduct may result in negative externalities that harm society. As a number of recent scandals, including those examined by a high profile 2019 Royal Commission in my own country, Australia, have demonstrated, incentives designed to address problems of corporate performance can exacerbate harm to stakeholders or society as a whole, by creating perverse incentives for corporate misconduct or unethical behaviour.
‘Responsible capitalism’ represents a significant shift in the direction of modern corporate governance. It will involve an increased focus on society’s expectations of corporations, particularly in an era marked by a cascading series of global financial, environment and health crises. It will also entail recalibration of incentives and regulatory techniques to ensure corporate accountability. There may be broad agreement that capitalism needs to become more ‘responsible’. However, the devil will be in the detail and the feasibility of establishing credible incentives and credible metrics. The dangers of ‘greenwashing’ and malleable environmental metrics in executive pay represent significant hurdles to achieving the goals of ‘responsible capitalism’.
Jennifer G. Hill is an ECGI research member and the Bob Baxt AO Chair in Corporate and Commercial Law, Monash Law School, Australia
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 Milton Friedman, ‘The Social Responsibility of Business is to Increase its Profits’, NY Times Magazine, Sept. 13, 1970, 17.
 Phillip I. Blumberg, The Corporate Entity in an Era of Multinational Corporations, 15 Del. J. Corp. L. 283, 285 (1990).
 Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751 (2014).
 The British Academy, Policy & Practice for Purposeful Business: The final report of the Future of the Corporation programme, Executive Summary (2021) (available at https://www.thebritishacademy.ac.uk/publications/policy-and-practice-for-purposeful-business/).
 U.K. company law, on the other hand, had more private organizational origins in the form of the unincorporated joint stock company. See generally Jennifer G. Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering Combat’  U. Ill. L. Rev. 507, 541-47.
 Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (2d ed. 2017).
 ‘Business: A Cry for Courage and Compassion’, Time, Jun. 1, 1970, 55.
 Commonwealth of Austl., Final Report Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Vol. 1 (2019).
 See, e.g., Douglas MacMillan and Julia Ingram, ‘Elizabeth Warren asks SEC to investigate compensation at fossil fuel giants’, Washington Post, Dec. 15, 2021.