Corporate law as public policy - Cambridge University Press & Assessment

Implications of corporate law as public policy Two main implications arise from seeing corporate law as public policy. First, the state is currently active in corporations and so should be seen as culpable for perceived corporate social harms. Second, this analysis is inherently and exclusively legal. First, different conceptual approaches to corporate law view the state’s locus to regulate corporate affairs differently (Bratton, Reference Bratton1989b). Any approach allows extremely egregious behaviour to be externally regulated (e.g., environmental laws can mitigate environmental harms), but only concession approaches encourage direct state engagement in internal corporate dynamics (Hardman, Reference Hardman2023). If corporations are merely the sum of their parts, or real, then the state is inherently external, and so requires more to justify ‘intervention’. Concession theory normally argues that the state is ‘justified’ in ‘intervening’ in corporations (Bottomley, Reference Bottomley2024). This connotes a beneficent state poised to rescue society from corporate excesses. Viewing corporate law as public policy – however tacit – changes this. The state is actively involved in corporations and should be seen as equally culpable for any social harms that are perceived to be caused by them. The state may decide to leave corporate harms unremedied because it deems public benefits worth it. This can be viewed in the inverse – if the state has not remedied a perceived social harm, then either it has tacitly decided that the harm is outweighed by its other public benefits (by not devoting enough state resources for evaluation) or not realised it should. There is an inherent balancing of harms and benefits, but (as with Kaldor-Hicks efficiency) harms and benefits will be uneven. Net social benefit calculus could cause the same constituents repeated harm and others repeated benefits. Law’s allocations of rights are inherently distributive (Hale, Reference Hale1943). The result is akin to the Epicurean trilemma that because suffering exists in the world, God can only be any two of all-powerful, all-knowing, and all-good (Capitan, Reference Capitan1966), and not all three. If corporate activity is seen as socially harmful, then, as corporate law is an ongoing public policy balance, the state can only be two out of competent, all-knowing, and acting in the public benefit. Either the state is incompetent, ignorant, or not acting in the overall public benefit. Those who analyse the state’s role in corporate law tend to request more state activity (Ripken, Reference Ripken2010). Viewing corporate law and the corporate form as public policy demonstrates this is misguided – the state causes and is unlikely to be able or willing to resolve perceived issues. Regulatory capture (Slayton and Clark-Ginsberg, Reference Slayton and Clark-Ginsberg2018) means the state may benefit particular constituents – those most powerful already (Ireland, Reference Ireland2005). For example, even should employee ownership (Dow, Reference Dow2022) prove socially optimal, the state may not change corporate law if subject to regulatory capture from existing shareholders. Second, this analysis is limited to corporate law. The state can deploy other tools to encourage or discourage corporate behaviour – like taxes and subsidies. Corporate law is, though, inherently linked to the state. This is a very corporate legal analysis (Hardman, Reference Hardman2024). It therefore helps delineate corporate law analysis from complementary disciplines on two fronts. First, from the study of individual business vehicles. Individual companies are voluntarily formed and can be autonomous entities (Vinogradoff, Reference Vinogradoff1924). The state sets the corporate landscape, though, and features of the corporation incentivise certain behaviours through its setting of corporate law. These state-set features, and only these features, should fall within the remit of corporate law scholarship. Second, the criteria that the state must use in striking this public policy balance are extrinsic to corporate law. Descriptively identifying that corporations and corporate law are the results of public policy balances, however unintentional, and suggesting some potential considerations does not definitively identify how states should balance policy considerations. Many categories of public benefits and harms are unquantifiable, and I provide no claim for which benefits the state should maximise or which harms it should avoid. It is arguable that the state should focus on ensuring strong public markets (Cheffins and Reddy, Reference Cheffins and Reddy2023), or protecting investors from agency costs (Bebchuk, Cohen and Ferrell, Reference Bebchuk, Cohen and Ferrell2009), or minimising environmental harm (Sjåfjell et al., Reference Sjåfjell, Johnston, Anker-Sørensen, Millon, Sjåfjell and Richardson2015), each as a way to maximise public benefits. Moving to considering such evaluative criteria, rather than arguing about whether the state can engage if willing, takes corporate law a step closer to playing the role that it should in a wider, interdisciplinary understanding of the company (Hodgson, Reference Hodgson2022). This article argues for the need to conceptualise the state’s role in corporate law and corporations. Features of both are provided by the state, for deliberate or tacit public policy reasons. Modern corporate law theory traditionally misses the importance of the state in the corporate form and corporate law. Public policy, however, underpins corporate law and the corporate form. In turn, each aspect of corporate law and each feature of the corporation should exist only and to the extent that public policy continues to justify it. There may well be strong restraints on the state’s willingness to dramatically exercise its powers, but that remains conceptually different from the presence of such powers. It may be that corporate law as currently constituted, the corporate form that it establishes and the incentives for behaviour that it creates are optimal for society. Equally, it may not be. In either event, understanding the optimality of the status quo and options to change it requires a proper understanding of that status quo. Backgrounding the role of the state does not provide such clarity. Implications that the corporate form is solely private and that features provided to its constituents arise naturally or inherently miss the ongoing role that the state plays in setting corporate law and the rules of the game for corporations. So, too, does talk of the state ‘allowing’ certain behaviours and concepts such as state ‘intervention’ requiring ‘justification’. The state is heavily implicit in the status quo, for good and for bad. This means that the state is more involved in the corporate form than modern corporate law theory allows. It also means that a benign state is not in and of itself the answer to corporate ills as a white knight ready to free us from corporate excesses. Whatever your normative take on what the corporate form and corporate law should do, encourage, or facilitate, understanding that the state is at the heart of such a normative vision is key.