Corporate Governance in an Era of Geoeconomics

The “End of History” for corporate law and governance has come to a messy conclusion, marked by U.S.-China rivalry, techno-nationalism, economic sanctions, export controls, supply chain vulnerability, and resulting efforts by multinational enterprises and their governments to “de-risk” in a global environment that has upended many assumptions on which the post-Cold War economic order operated. 

This new global environment has ushered in the era of geoeconomics – “the pursuit of power politics using economic means.” Geoeconomics requires leveraging, curtailing or blocking the actions of profit-oriented commercial enterprises to increase governmental power vis-a-vis geopolitical rivals. It thus places corporations in a role for which they are unaccustomed and organizationally not well suited. As a result, the era of geoeconomics portends significant changes in the corporate governance environment.

In a recent paper, I explore the potential implications of geoeconomics for corporate governance of publicly listed U.S. firms. To frame the inquiry, I contrast the optimism about globalization and convergence that infused academic corporate governance debates around the turn of the twenty-first century with the darker vision of “weaponized interdependence” that fuels contemporary discussions of de-coupling. I trace the steps in one of the principal forces driving weaponized interdependence, the geopolitical chain reaction between China and the United States.

The paper’s assessment of the implications of geoeconomics for U.S. corporate governance emphasizes the following:

Rising perceptions of risk

Corporate perceptions of geopolitical risk are now widespread and acute. Consistent with other recent measures of risk perception, my research indicates steep increases in mentions of various forms of geopolitical risk in Annual Reports on Form 10-K over the past twenty years. For example, the number of mentions of “supply chain vulnerability/interruption” rose from virtually zero in 2003 to over 6000 in 2023.

An Increasingly Complex Policy Environment

In geoeconomics as in ESG (concern for environmental, social and governance issues), corporations are being called to internalize the externalities of their operations and to partner with, or substitute for, the government in achieving objectives beyond the ordinary commercial remit of the private sector. In policy terms, it is useful to consider this the era of ESG + G (for geopolitics or geoeconomics). But in contrast to the bitter political division over ESG, there is widespread bipartisan support in Washington for policies to address the perceived threat to global security and the rules-based international order posed by China. This suggests that corporations will need to adapt to their long-term role on the front lines of geopolitical rivalry.

Effects on Firm-level Governance

Board and senior executive expertise: U.S. corporations face a “make or buy” decision on geopolitical expertise. My research indicates that while the number and percentage of independent directors with international experience is significant and increasing steadily, the number of independent directors with experience in government or the military – presumably valuable training ground for skills directly relevant to the oversight of geopolitical risk – is modest and declining. 

Governance of geopolitical risk: It is still uncommon for U.S. corporations to disclose whether and where within the firm geopolitical risk is assessed. My search of all U.S. public company filings from 2018 to 2024 reveals that only 154 Russell 3000 companies (5.1%) disclosed that a specific corporate governance organ or officer was responsible for oversight of geopolitical risk (excluding cybersecurity). In most of the disclosing companies, the board, either alone or together with senior management, oversees geopolitical risk. A small number of companies have assigned the task to a specialized risk committee or risk officer. Virtually none of the disclosing companies provides any information about how geopolitical risk is assessed or mitigated, presumably a subject of importance to investors and other stakeholders, including the government.

Compliance: The dense thicket of sanctions and technology transfer restrictions that sprouted in the Trump administration has continued to grow under the Biden and second Trump administrations, adding complexity to the corporate compliance function. It is now routinely said that “economic sanctions are the new FCPA [Foreign Corrupt Practices Act],” while others have remarked that “export controls are the new sanctions.” Heightened geopolitical risk to corporate strategy and operations appears to be altering the role of the general counsel in some firms, expanding their role in risk assessment, crisis management, and strategic guidance.

Supply chain management: The Biden administration promoted U.S. supply chain resilience as a matter of national security and competitiveness. The CHIPS for America Act sought to reduce reliance on Taiwan as the principal source of semiconductors by promoting U.S. capacity in advanced chip manufacturing. Another part of the strategy sought to improve coordination and trust-building on supply chain issues by forming networks among U.S. allies. It is unclear whether the second Trump administration places a similarly high priority on a complex, protracted process requiring close collaboration between Western governments and corporations to evaluate and manage each stage of often lengthy supply chains. 

Litigation risk: The heightened compliance risks and supply chain rewiring challenges just discussed – and illustrated in the steeply rising Form 10-K risk factor counts my research reveals – implicate two major sources of litigation risk: the Delaware judiciary’s well-known Caremark doctrine on a board’s duty to monitor, and class action securities litigation for materially misleading statements and omissions in corporate communications. 

Under current Delaware doctrine, the potential for Caremark liability plainly exists with respect to corporate losses incurred due to a board or an officer’s failure to monitor compliance with export controls and related national security regulations, since they constitute violations of positive law. But interesting questions remain about potential Caremark liability for geopolitically induced corporate trauma in the absence of legal violations, for example, losses stemming from supply chain vulnerabilities or poor estimation of geographical/political risk factors in capital allocation decisions. 

A second form of heightened litigation risk arises out of securities disclosures. As the magnitude and range of risks related to geopolitical tensions and events steadily increase, the specter of shareholder class action litigation for failure to disclose material geopolitical risks has also grown. At the same time, however, companies face significant challenges in determining the precise nature of the risks that require disclosure.

Investor/public and government relations: Geoeconomics is also confronting boards with new investor and public relations challenges, such as criticism of continued investment or operations in China and shareholder proposals on geopolitical subjects. These challenges amplify controversies that have arisen in connection with the ESG movement. Lobbying and corporate influence will also become an even more controversial subject, as companies vie for defense contracts and the national security partnership between government and the private sector deepens.

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Curtis J. Milhaupt is the William F. Baxter-Visa International Professor of Law at Stanford Law School, a Senior Fellow of the Freeman Spogli Institute for International Studies at Stanford University, and an ECGI Research Member 

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