In a recent working paper, I explore the intersection of contemporary corporate governance and transnational law. Transnational law is, of course, far from a settled concept. For early theorists, it involved conduct or events that crossed national boundaries. More recent scholarship, however, has focused not on what is being regulated, but rather on how laws and norms are transmitted between supranational and local levels.
Corporate governance fits naturally within this modern conception of transnational law. Today’s corporate governance is highly fragmented and includes a complex array of public and private actors. It also embodies legal and non-legal elements, which operate to constrain and enable the behavior of these key corporate actors – a central aspect of transnational legal ordering. Also, financial markets are now global and interconnected and events, such as the 2007-2009 global financial crisis and the current COVID-19 pandemic, exemplify the risk of contagion across markets at a supranational level.
Not only can corporate governance problems transcend national boundaries, so too can their solutions. Determining the causes of these problems is critical to crafting a regulatory solution, yet this is often no easy feat. The collapse of Enron at the beginning of the 21st century and the global financial crisis showed that there can be multiple possible interpretations of the underlying causes of such crises. Regulatory solutions, however, will only address the particular interpretation that gains traction and ascendancy.
In the aftermath of these crises, and in the midst of the current pandemic, the corporation has taken on a greater societal role. Indeed, according to The British Academy’s influential Future of the Corporation project, the main purpose of business today is “to solve the problems of people and planet profitably”.
My paper explores the transmission of laws and norms that are designed to constrain directors’ conduct and enhance corporate accountability. It focuses on two key examples of such accountability mechanisms – fiduciary duties and corporate codes – and highlights the horizontal and vertical transmission of laws and norms.
The paper begins with a comparative and historical account of directors’ fiduciary duties in several common law jurisdictions. It shows that, although the law of fiduciary duties was, from a historical perspective, a distinctly national affair, there are strong similarities in the approach to directors’ fiduciary duties across common law jurisdictions, such as the United Kingdom, the United States, and Australia, as a result of horizontal transmission of law between the United Kingdom and its colonies. Similarities between common law jurisdictions were an important aspect of La Porta et al.’s influential law matters hypothesis. As the paper shows, however, although it is often assumed that the common roots of UK, U.S., and Australian corporate law have resulted in a unified common law approach to fiduciary duties, there are significant differences at a more granular level.
The behavior of corporate actors is not, however, shaped only by enforceable laws, such as directors’ duties. It is also shaped by social norms and governance practices, which may be more important than formal legal rules in affecting the behavior of certain corporate actors, including directors. The paper therefore considers the modern phenomenon of corporate codes from this perspective, focusing on two types of codes that have become prominent in recent times: corporate governance codes and shareholder stewardship codes.
Corporate codes originated in the United Kingdom in the early 1990s but have subsequently spread throughout the world, representing a form of so-called “soft law.” The paper explores the global transmission of these codes, which are constantly evolving, and how they have evolved to constitute powerful “norm creators”.
Interesting tensions between hard law and soft law are apparent at an international level. Many common law jurisdictions – though not the United States – protect certain fundamental shareholder rights by mandatory rules in their corporations legislation. The vision of Delaware corporate law as inherently “enabling” has restricted the level of mandatory rules under U.S. state corporations law. As a result, much U.S. corporate law is made, not by the state, but rather by private ordering by corporate actors. In recent times, institutional investors have sought to engage in “private ordering combat” to transplant numerous mandatory shareholder protection rules, embedded by statute in other common law jurisdictions, into the United States on a company-by-company basis. This U.S. trend demonstrates the use of private ordering by shareholders as a self-help mechanism. It suggests that, in an era of globalized investment, institutional investors have become increasingly aware of comparative legal rights across jurisdictions, and it has effectively rendered the United States an importer, rather than exporter, of corporate law.
Although the United Kingdom was the progenitor of corporate governance codes and stewardship codes, the codes, which have been adopted around the world, are by no means uniform. Major divergence in the content of these codes is attributable to a range of factors, not least of which is the source of the code. For example, the 2018 UK Corporate Governance Code, which is administered by an independent government-backed regulator, the Financial Reporting Council, stresses that the role of a successful company is not only to create value for shareholders but also to contribute to wider society. It provides a sharp contrast with the strongly private, shareholder-focused conception of corporate governance in the U.S. Corporate Governance Principles, which were issued in 2017 by the Investor Stewardship Group (“ISG”), a collective of some of the largest, U.S-based and international asset owners and managers, including several activist hedge funds. Divergence in the content of these codes highlights the importance of the issue of “who writes the rules”.
This post comes to us from Jennifer G. Hill, the Bob Baxt AO Chair in Corporate and Commercial Law and director of the Centre for Commercial Law & Regulatory Studies (CLARS) in the Monash University Faculty of Law, Australia, and a research member of the European Corporate Governance Institute (ECGI). It is based on her recent working paper, “Transnational Migration of Laws and Norms in Corporate Governance: Fiduciary Duties and Corporate Codes,” available here.