Stakeholder Capitalism

Abstract

<p>The concern over the lack of corporate respect for stakeholder interests and human rights was raised many years ago and is even more relevant today. Internalizing externalities, or corporate social responsibility in legal terminology, has become a hotly debated topic for many years. The need for companies to respect not only the claims of shareholders but also the interests of stakeholders – such as employees, consumers, suppliers and the environment – has become a major concern of the international community due to inadequacy of the law and lack of enforcement. The problem is caused in part by the limit of common law on directors’ duties, in particular, their duty to maximize profits for the shareholders, not other stakeholders. </p><p>Various creative solutions had been found to better integrate the interests of stakeholders. However, one of the most difficult and neglected areas in the stakeholder debate concerns their implementation. This book tackles this issue and asks how stakeholders can be effectively integrated into the corporate governance structure and decision-making process through stakeholder board. It further addresses the question how this might be sensibly implemented at the national and/or international level. It is a book that defends stakeholderism over shareholder primacy and argues for stakeholder boards to be adopted globally with proper adaptation and for better stakeholderism in China through the stakeholder committee.</p><p>In proposing such a solution, this book adopts an economic efficiency approach to law reform adopting economic principles, to avoid some of the unintended consequences of legal approach to law reform and help design better rules that promote allocative efficiency for the benefit of society as a whole. It argues that international organizations should take the lead to promote the use of stakeholder board in multinational corporations that have a history of corporate abuses for corporate decisions that have an impact on all stakeholders. </p><p>This book finds, through historical lenses, that the true purpose of corporations has changed over the years from originally invented to serve the interest of the society, to profit maximization for shareholders when they were adopted by entrepreneurs for business. It argues that whilst profit is a necessity from the entrepreneurs’ and other stakeholders’ point of view, maximization of it for the benefit of shareholders does not serve the interest of society well. We should return to the true purpose of corporations which is to serve the interest of the society, not merely shareholders. </p><p>It further argues that whilst in economic theory, maximization of profit for shareholders would be most efficient for society if all costs of the corporation’s operation are internalized, in practice, this does not happen. It points out that looking after stakeholders’ interest by internalising negative externalities could be more efficient and suggests that a stakeholder board could act as an appropriate governance structure for this purpose. </p><p>As it is not possible to conduct empirical study on the proposed stakeholder board which does not yet exist, this book draws on the evidence from the practical benefits of, and the academic and theoretical arguments on the benefit of the German co-determination board, which is one type of stakeholder board, albeit only restricted to the workers and shareholders, as well as some recent positive empirical evidence concerning co-determination board, to predict the probable efficiency of a stakeholder board. Thus, my criticisms of capitalist corporate governance state the premises and provide the starting point for my stakeholder governance model. </p><p>The book ends by proposing the use of stakeholder board in China. To sustain the economic growth and its political legitimacy and dominance, the Chinese government has incentive to implement CSR which it attempted to do through its corporate law. But an effective mechanism for such implementation is lacking. As well, the purpose of corporations under Chinese company law is to serve the interest of the state. China’s failed attempt to improve SOEs has led to the recent adoption of party committee in SOEs. The integration of party committee into SOEs’ governance structure is a necessary characteristic in China to ensure SOEs are run for the benefit of the state, and there is empirical literature on the effectiveness of party committee’s integration. Whilst this book is not about Chinese law, the recommendation of a stakeholder board for Anglo-American board can also be made to improve the governance structure of China’s SOEs. It explains the importance of stakeholder committee or board to Chinese SOEs and proposes two ways to weave stakeholder committee or board into SOEs’ current governance structure by a minor improvement to the composition of party committee and the terms of reference on its members’ duties. </p>