Engines of External Governance

Who shapes corporate governance? Most accounts focus on shareholders, directors, and officers, and treat corporate governance as largely an intra-firm issue. Recent scholarship has identified additional actors and forces, including the various constituents of the “corporate governance machine,” and organizations that have propelled “the rise of international corporate law.” Other commonly explored influences include individual corporate gadflies, the state as a shareholder, and broader forces such as geopolitics.

In our forthcoming article Engines of External Governance, we examine how nonprofits have become key actors aiming to shape the governance of for-profit business corporations. Nonprofit influencers ranging from Oxfam and Greenpeace to the Interfaith Center for Corporate Responsibility and the National Center for Public Policy Research target corporate governance as a means of pursuing their own missions through change at some of the world’s largest corporations. We describe key features across the universe of nonprofits involved in this activity, their multipronged strategic playbook, and the patterns and implications that emerge from focused study. 

A Wide Range of Nonprofits Shaping Corporate Governance

By mapping nonprofit influencers across jurisdictions, we show how they vary along several salient dimensions: when they emerge, how centrally governance figures in their missions, and whether they operate domestically or transnationally. They also vary in funding and in perceptions of whose interests they serve. We highlight that despite these significant differences, they have in common the choice to act through the nonprofit form which can provide durability, scale, formal separateness, reputational capital and legitimacy, and a degree of “identity shielding” for participants. 

The Multipronged Strategic Playbook 

Nonprofits employ an array of strategies to achieve their objectives, sometimes in dynamic combinations and while mobilizing partners for assistance. Lobbying for disclosure legislation, for example, becomes far more potent when combined with shaming campaigns, while standard-setting can slowly build investor awareness that ultimately hardens into voting guidelines or new legislation. Notably, nonprofits with opposite ideological commitments often use a mix of the same tools and tactics for influence:

• Legislative and regulatory advocacy. Nonprofits lobby for legal change and have contributed to key developments such as global supply chain and related legislation, benefit corporation statutes, and anti-ESG legislative efforts.
• Litigation. Nonprofits have brought novel litigation against companies and directors, and challenged regulatory requirements on issues ranging from climate-related governance to anti-ESG claims. In some jurisdictions, nonprofits also substitute for the absence of a robust plaintiffs’ bar by acting as important plaintiffs and helping solve shareholders’ collective action problems.
• Shareholder proposals. Nonprofits are among the top proponents filing shareholder proposals both championing and attacking corporate engagement with environmental and social issues. They also aim to influence longstanding governance topics and operate as “laboratories” of governance ideas, from de-staggering boards to pursuing systems-level investing.
• Soft law and shaming campaigns. Nonprofits influence governance through standard setting, codes of conduct, indexes, white papers, advising and collaboration, and shaming campaigns that shape and enforce norms outside formal legal channels.

The Dynamics of Unpredictable Chain Reactions, a Hydraulic Effect, and Broader Implications

Exploring the universe of nonprofits and their strategic playbook reveals the patterns and implications of this activity, as well as a host of normative considerations.

First, nonprofit activism has generated unpredictable chain reactions in which actions spark reactions in surprising and often unintended directions. Perhaps the most striking historical example is the wave of CSR-related activism by nonprofits in the 1960s and 1970s, which paradoxically helped catalyze the development of shareholder primacy theory. More recently, nonprofits pushing ESG, DEI, and climate-related agendas have sparked an equally vigorous countermobilization by other nonprofits, producing unpredictable trajectories of developments that go beyond simply restoring the previous status quo.

Second, the diverse missions, global reach, and multifaceted strategies of these nonprofits give rise to a hydraulic effect in which narrowing a channel of influence does not eliminate nonprofit pressure but rather redirects it through other means. This dynamic helps illuminate current policy debates, such as efforts to restrict shareholder proposals, and shows why attempts to curtail specific mechanisms of influence may fail to eliminate the underlying pressures that nonprofits harness and represent. 

Third, the persistence of these pressures across channels also helps explain why twenty-first-century corporate governance around the globe has not followed the predicted linear path toward convergence. The push to consider external interests is not only due to efforts by managers, shareholders, and stakeholders writ large, but also to sustained activism by organizations devoted to causes other than profit. Increasingly, many nonprofits view corporate governance as a central forum to advance, or conversely to resist, broader social reforms. Further, their transnational reach means that small victories in one jurisdiction can lay the foundation for developments elsewhere.

Finally, recognizing nonprofits as engines of external governance raises important normative

questions while defying easy categorical assessments of their impact as uniformly positive or negative. Nonprofits may operate as vital intermediaries and subject matter experts that can provide checks and balances, and help fill gaps left by market failures or inadequate regulatory oversight. However, they can also generate conflicting priorities that hamper corporate decision-making, crowd out governmental regulation, or contribute to costly and unpredictable regulatory environments. Nonprofits also present distinct agency problems and legitimacy concerns given that they often operate without significant financial stakes in the firms they target, are shielded by organizational opacity, and may lack accountability for their influence. The same organization that might impose costly external demands in one campaign might helpfully reduce collective action problems in another, and the rapid cycle of action and backlash can transform today’s reform into tomorrow’s instability. Recognizing these complex dynamics is essential not only for understanding real-world developments in corporate governance, but also for informing efforts to shape its future direction.

Mariana Pargendler is the Beneficial Professor of Law at Harvard Law School, and an ECGI Research Member.

Elizabeth Pollman is a Professor of Law at the University of Pennsylvania Law School, and an ECGI Research Member.

This blog is based on a paper presented at the the twelfth annual Global Corporate Governance Colloquia (GCGC), hosted by the National University of Singapore and ECGI. Visit the event page to explore more conference-related blogs.

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