News

With impacts ranging from economic to environmental, corporations play an important role in American life. And today they face a multitude of pressures, from new technologies and climate change to challenging economic policies and geopolitical tensions. 

Such global risks and challenges, which bind the futures of both companies and society, could be mitigated by changes to corporate law, says Duke Law professor Emilie Aguirre. 

The traditional model of corporate law has long centered on the needs of shareholders and managers, creating a power imbalance that favors their interests over those of other stakeholders, such as workers and the environment, she says. In research that incorporates insights from organizational theory, Aguirre posits a new approach to corporate law that places those stakeholders as the firm’s primary investors and, she argues, can help remediate that imbalance and mitigate some of its harmful impacts on society. 

“We are asking people to think of corporate law in a really new way: Can we reimagine corporate law in a way that aligns with how organizations actually behave?” Aguirre said.

“By changing the way firm leaders remain accountable, make decisions, and set goals, corporate law can help address the problematic power imbalances it currently perpetuates.”

In An Organizational Theory of Corporate Law, Aguirre and business professors Julie Yen of Boston University and Julie Battilana of Harvard point out that the longstanding influence of neoclassical economics on corporate law has limited its application to narrow questions of contracts, transaction costs, and principal-agent problems. This fails to account for the nuances of how corporations actually operate in the world. 

“The modern approach to corporate law provides a descriptively incomplete picture

of how firms and markets function. The firm is not just a nexus of contracts but also a complex and adaptive social structure,” they write.

Aguirre focuses on workers and the environment, whose interests she says have not historically fallen under corporate law’s domain. This is partly because specialized areas of law have sprung up to deal with questions of employment and the environment. But she argues that because human capital and natural capital are two key factors in a firm’s output, corporate law should give voice to those issues. 

“If we take a step back and think about all the different parties that are investing in a firm, it leads us to a very different conclusion about what corporate law should cover,” Aguirre said. “Capital comes in multiple different forms, and there are lots of different inputs into the firm. What if we integrated that into the law that's governing the corporation, and recognized that shareholders are not the only party investing in the firm?”

Realigning the system to balance stakeholder interests

Corporate law has historically ignored or even entrenched asymmetric power imbalances: of boards and shareholders over workers and the environment, and boards and insider shareholders with additional voting rights over those with minority stakes, Aguirre and her co-authors say. Instead, corporate law reinforces the power of boards and insider shareholders by providing few avenues for shareholders, workers, or environmental advocates to pursue their interests in critical executive decisions or exercise oversight or accountability. The scholars cite changes to Delaware corporate law after its legislature adopted a law drafted by Tesla’s law firm with the aim of protecting the pay package of its founder and CEO Elon Musk. 

“A baseline assumption for economic models is that firms are subject to the rules of the system, meaning the laws,” Aguirre said. “You can lobby as part of that system to change the laws, but it raises some serious questions when people are able to actually rewrite the laws.”

Against the broader backdrop of economic, social, and environmental upheaval, such developments and the migration of firms, including Tesla, from Delaware to other jurisdictions, have contributed to a broadening consensus that corporate law is ripe for reform, Aguirre and her co-authors say. 

Their recommendations include creating a more robust voice for workers and  environmental advocates through measures like including representatives for their interests on corporate boards; redesigning fiduciary duties to make directors accountable to all three primary focus areas — workers, the environment, and shareholders — in their decision-making; and rethinking executive compensation by creating incentives for improving worker well-being and environmental metrics  and basing some compensation  on equity rather than stock options to better align long-term goals with performance. 

In Aguirre’s view, corporate law reform is an untapped resource in addressing what many have come to see as a system that favors the interests of corporations and executives over those of other stakeholders.

“When the rules of the game are seen to be in favor of private individuals, that has really negative systemic, societal consequences – but they are ones that we can fix,” Aguirre said. “Just wanting to do the right thing is not going to get us there. The entire system needs to evolve to make it easier to facilitate doing the right thing.”