What do the emergence of independent directors in South Korea, the legal reforms on related-party transactions in India, the continued rise of environmental, social, and governance (ESG) factors in the United States, and the global spread of corporate governance codes have in common? They all trace back to efforts by international organizations – the International Monetary Fund (IMF), the World Bank, the United Nations, and the Organisation for Economic Cooperation and Development (OECD), respectively – to shape corporate governance around the world. The different corporate guidelines and norms produced by international organizations have had a noticeable impact on legal changes across multiple jurisdictions. Yet the literature on comparative corporate governance (CCG) has failed to notice and reflect on the creeping rise of what can be termed “international corporate law” (ICL), a phenomenon that I describe in a recent paper.
Comparative corporate scholarship has assumed that any convergence among domestic legal systems would result from decentralized systems of competition in product markets, capital markets, and national laws. One recurrent assumption was that corporate law models would travel, and over time the best models would win. Yet this view offers at best a partial understanding of the evolution of corporate law since the turn of the century. Some models travelled faster because of their active international promotion.
Coordination efforts by international institutions, rather than unilateral moves prompted by regulatory competition alone, have played a role in several corporate law developments around the world. Unbeknownst to most observers, the various guidelines and initiatives by international organizations such as the IMF, the World Bank, the OECD, and the United Nations have amounted to a sizable body of international corporate law. Beyond international organizations proper, transnational institutions and standard-setting bodies such as the International Organization of Securities Commissions (IOSCO), the Basel Committee on Banking Supervision, and the Financial Stability Board have also increasingly influenced corporate governance developments.
The emergence of ICL is not only surprising for its international origin and coordinated form, but also for its substance. ICL has sought not only to enhance investor protection (an outcome predicted by convergence proponents), but also to address various externalities generated by corporate activity, such as systemic risk, environmental harm, and human rights violations (an outcome that was not foreseen). ICL is also not merely a vehicle for the diffusion of Anglo-Saxon practices, but has become increasingly a source of institutional innovation, including in directions resisted by the United States.
The IMF imposed various corporate law reforms on South Korea, including the requirement of independent directors, as a condition for financial support at the height of the Asian financial crisis in the late 1990s. In the mid-2010s, India reformed its corporate laws to improve its relative ranking in the World Bank’s Doing Business Project, a mechanism that arguably serves both to lure foreign investment and to obtain World Bank funding. By the late 2010s, the corporate governance debate around the world had placed great emphasis on ESG factors – a concept first coined in 2004 and since then dutifully promoted by various United Nations initiatives. More generally, jurisdictional competition for corporate law may become increasingly bounded by international lawmaking.
What explains the rise of ICL in the face of the dominant view that coordinated efforts at harmonization are not only unnecessary but even counterproductive? While this complex phenomenon is certainly multifaceted and not monocausal, I interpret the emergence of ICL as a solution to two critical problems within corporate law:
Interjurisdictional externalities. Corporate activity can have negative effects on third parties, such as producing systemic risk, environmental harm, and human rights violations. In the orthodox law and economics view, these externalities should be addressed through regulations from legal fields other than corporate law. However, states may be reluctant to impose regulations on local companies if – as is often the case – the negative effects are largely felt abroad, as this could affect their international competitiveness. Moreover, dedicated regulation from other fields is famously absent in the international arena, thus leading to major regulatory gaps which ICL may seek to fill.
Political capture by domestic interest groups. Even when the promotion of shareholder protection or the mitigation of externalities are welfare enhancing within a given country, reforms may still not materialize due to the political clout of powerful interest groups, such as controlling shareholders, managers, or labor unions. Moreover, states are famously inconsistentin protecting foreign investors, initially seeking to attract such investors only to renege on early promises once their investment is sunk. In this context, international law initiatives may weaken the political force of domestic interest groups in defending rent-seeking measures and promote credible commitments to investor protection.
The rise of ICL as a robust and influential phenomenon deserves corresponding attention. While the international dimensions of other fields such as bankruptcy law, antitrust law, anticorruption law, administrative law, and financial regulation have been the subject of a booming literature, corporate law scholarship has thus far failed to track institutional developments in the international arena. Greater understanding of the role and impact of ICL, as well as of its welfare effects, is necessary to better understand and influence the development of corporate governance institutions. The paper’s aim is not to conclude the study of ICL, but to start it.
This post comes to us from Mariana Pargendler, a professor at Fundação Getulio Vargas Law School in São Paulo and New York University School of law. It is based on her recent article, “The Rise of International Corporate Law,” available here.