Convergence, Diversity, and Divergence: The Two Axes of Corporate Law and Governance

Corporate law and governance has now divided along two axes, the axis of Internal Governance and the axis of Externalities Governance. A generation after “corporate governance” became a global phenomenon, we see an established a vocabulary of corporate governance mechanisms, norms, and behaviors on the axis of Internal Governance. Within the convergent framing standard of “investibility,” we can expect diversity that responds to local imperatives, including original and continuing ownership patterns and efforts by the State to shape corporate governance tools to promote the State’s economic and social policy objectives. But the major move in corporate law and governance over the past decade has been the development of a second corporate governance axis, Externalities Governance. Climate change risk associated with greenhouse gas emissions is the most salient externality but a broader set of social welfare concerns, made visible through developing disclosure regimes, now figures into corporate governance. Commitments and behavior along the Externalities Governance axis will have substantial variance and are likely to be volatile because they are not anchored to a clear goal of maximizing production or linked to parties bound to the firm in the nexus of explicit or implicit contracts but rather depend on a time-varying socio-political consensus. The EU has been the most aggressive jurisdiction in mandating Externalities Governance by positive law. Although the scope of the EU mandate is now under revision for both the coverage threshold (and thus the number) of subject firms and the breadth of coverage, the extraterritorial ambition remains. A “Brussels” effect could achieve significant convergence on Externalities Governance. The counter of course is the United States, through an Administration that is determined to protect US fossil fuel interests and lumps all other externality concerns in the same basket. This could lead to significant divergence for US firms and there may yet be a retrograde “Washington” effect on the general idea that social welfare concerns should be at least a partial focus of corporate law and governance.