Corporate governance scholars to date have focused almost exclusively on the economic impact of corporate control – specifically the diversion and creation of wealth by controlling shareholders (commonly referred to as “tunneling” and “idiosyncratic vision,” respectively). Analysis of the distinctive fusion of economic and political power in controlling shareholders and the range of policy domains in which controlled firms are key protagonists have been largely absent from the literature.

Consider a few prominent examples of the (geo)politics of controlling shareholders: Elon Musk has been called a “geopolitical chaos agent” for inserting himself into volatile conflicts around the world.[1] The Chinese government launched a “de-tycoonification” campaign to curb the influence of billionaire founders of private firms such as Jack Ma in its domestic internet industry.[2] In order to avoid delisting for failure to comply with audit inspection requirements, federal securities law now requires foreign firms listed on U.S. securities exchanges to establish that they are not “owned or controlled by a [foreign] governmental entity,”[3] reflecting congressional frustration with the Chinese government’s treatment of commercial information as state secrets beyond the purview of foreign regulators.

In a recent essay, I argue that, at a moment when the impact of corporations on society is receiving considerable attention, it is necessary for corporate governance scholars, boards of directors, and policy makers to grapple with the (geo)political ramifications of the power of corporate control.

Controlled firms and controlling shareholders are important actors in a range of corporate capitalist systems around the world. A longstanding example is business groups under the control of founding families, a prominent feature of developmental state capitalism. The chaebol groups and their decades of close interactions with the Korean government are a prominent example. A more recent example is the huge, globally active state-owned enterprises that emerged out of China’s system of party-state capitalism. In Russia, an oligarchic-klepto variant of state capitalism took root under the control of the Putin elite. And in the recent past, private technology firms under the control of individual founders such as Mark Zuckerberg and Jack Ma have claimed ownership over vast quantities of data with the potential to modify human behavior, sparking a backlash over what has come to be known as “surveillance capitalism.”

As these examples suggest, controlling shareholders and controlled firms implicate a number of important global and domestic policy domains, including national security, economic sanctions, corporate political influence, and the ESG movement.

The most acute geopolitical implications of controlling shareholders and corporate control lie in the realm of national security, together with the closely related fields of data protection and technological innovation. The rise of Chinese firms in the global economy – both state-owned and ostensibly private – with close ties to the party-state poses major policy challenges to the United States and other Western countries. Increased scholarly attention to the fusion of political and economic influence in the power of corporate control is needed to sharpen thinking about the regulation of controlled firms in the global economy.

Relatedly, controlling shareholders complicate the efficacy and impact of economic sanctions in the arsenal of responses to state aggression and violations of international law. For example, U.S. sanctions against Oleg Deripaska in 2016 were lifted when he gave up control over major aluminum producer Rusal, despite the fact that he retained a significant stake in En+, Rusal’s controlling shareholder. A common side effect of economic sanctions is to tighten the target state’s control over the economy and to further entrench the influence of controlled corporations.

Elevated socio-political status of controlling shareholders in the home country is an important “non-pecuniary private benefit” of corporate control.[4] This influence carries significant implications for domestic political systems and institutional development. In the United States, the debate in the corporate governance literature about the economic perils of dual-class capitalization structures is completely disconnected from rising concerns over outsized political influence of the tech industry among some antitrust thinkers and politicians. Yet dual-class structures are the typical mechanism by which corporate control in the tech industry, and concomitant political influence, are achieved.

Related to the issue of domestic political influence of controlling shareholders is the role of stewardship codes and ESG movements in markets where controllers dominate. Stewardship codes are intended to invigorate institutional investor engagement with portfolio firms to advance long-term corporate sustainability goals and inclusive practices. The original stewardship code adopted in the UK, which propelled the global proliferation of such codes, fits a corporate governance environment of dispersed ownership and strong institutional investors. These codes are an awkward fit in most of the rest of the world, where controlling shareholders are prevalent.[5] Their adoption in controlling shareholder regimes may risk diverting attention from more difficult legal reforms that would actually serve to enhance the protections of minority shareholders vis-à-vis controllers.

The interaction between ESG, (geo)politics and corporate governance raises a number of significant questions directly relevant to boards of directors. For example, in addition to managing an already daunting list of stakeholder interests, are boards of globally active firms prepared to grapple effectively with geopolitical risk – ESGG? Who do the independent directors of geopolitically important controlled firms represent and what interests should they safeguard? Might boards be subject to Caremark oversight liability for failing to appreciate and mitigate the geopolitical risks facing their companies, for example, the possibility of supply chain failures caused by economic sanctions or bilateral economic friction? Even more broadly, the ESG movement represents a call for the expansion of corporate influence over many domains of public governance in response to real and perceived failures of governments to address pressing environmental and social problems. As the ESG movement progresses, the political-economic implications of corporate control will inevitably increase even further, drawing corporations, and their controllers, even more deeply into the realms of domestic politics, national security, and geopolitical rivalry.

The lens through which controlling shareholders are viewed by corporate governance scholars should be widened considerably. This broader focus prompts new thinking about the power of corporate control and its implications well beyond the boundaries of the firm itself – shifting attention to many of the corporate protagonists who feature prominently in contemporary geopolitical tensions and domestic political influence.

ENDNOTES

[1] How Elon Musk Became a Geopolitical Chaos Agent, New York Times, Oct. 26, 2022.

[2] China’s Rulers Want More Control of Big Tech, The Economist, April 8, 2021.

[3] Holding Foreign Companies Accountable Act, Pub. L. 116-222, 134 Stat. 1063 (Dec. 18, 2020), codified at Section 104(i)(2)(B) of the Sarbanes-Oxley Act, 15 U.S.C. 7214.

[4] Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy, 119 Harv. L. Rev. 1641, 1663-64 (2006).

[5] Dan W. Puchniak, The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense Out of the Global Transplant of a Legal Misfit, Am J. Comp. L. (forthcoming).

This post comes to us from Professor Curtis J. Milhaupt at Stanford Law School. It is based on his recent essay, “The (Geo)Politics of Controlling Shareholders,” available here.