Over the past years, the Global North has witnessed the “rise of ESG” and a resurgence of interest in the role of corporate law in protecting stakeholders and promoting public policy objectives more broadly. New initiatives seek to mobilize corporate governance arrangements for objectives as varied as fighting climate change, curbing systemic risk, and promoting diversity and inclusion. From a comparative law perspective, however, the incorporation of broader objectives into corporate law arrangements does not look so novel. In fact, if we turn our attention to the Global South, we see that jurisdictions such as Brazil, India, and South Africa had already embraced novel, and often bolder, legal strategies to protect stakeholder interests.
These developments have been overlooked because, in general, the study of corporate law has traditionally neglected and demoted the Global South, as have studies in comparative law more generally. All too often, corporate laws in the Global South are examined based on the particular lenses and metrics conceived in the Global North, which until recently have focused almost exclusively on concerns about agency costs and investor protection. The result is an incomplete and impoverished view of the development of corporate law in the Global South.
However, as my recent work shows, we should take seriously the Global South as a pioneer in heterodox stakeholder approaches to corporate laws. It is especially important to do so because, in view of growing inequality and problems of state capacity, the Global North is increasingly looking more like the Global South.
I define heterodox stakeholderism in the Global South as (i) approaches that are distinct from the norm in the Global North in (ii) incorporating a broader set of public policy and distributional objectives in corporate law rules.
Take, for instance, limited liability – a paradigmatic feature of the corporate form that has been identified as a potential threat to the market system and the natural environment. Limited liability means that shareholders – who are the primary beneficiaries of a corporation’s financial success – are not liable for debts of the corporation, including those resulting from tort liability for harm caused to innocent third parties. Scholars have long recognized the incentives that limited liability creates for the externalization of harm, especially considering a corporation’s ability to reduce the assets available to tort victims through the creation of subsidiaries with separate legal personality.
In the past few decades, Brazil has largely eliminated shareholders’ limited liability for the benefit of stakeholders, such as workers, consumers, and victims of environmental harm. It has also the eroded limited liability of managers and controlling shareholders of financial institutions as a strategy to reduce systemic risk. Although Brazil’s experience is particularly broad and perhaps even extreme, the country is by no means alone in the Global South in embracing a more expansive approach to veil piercing with the aim of protecting stakeholders. In the wake of the much-publicized Bhopal disaster of 1984, in which the leakage of toxic gas from a Union Carbide pesticide plant took thousands of lives, Indian courts came to hold parent companies liable to tort victims of hazardous activities of corporate subsidiaries. Commentators – unaware of similar developments in other Global South jurisdictions – have described India’s approach as “unique” and “revolutionary” from a comparative perspective.
Or consider ESG. Long before interest in it exploded in the Global North, Indonesia and India mandated corporate spending on corporate social responsibility (CSR), and India and South Africa required dedicated committees for CSR and social issues. South Africa has been hailed as a pioneer in integrated reporting and as a “global leader in sustainable corporate governance.” Beyond CSR committees and integrated disclosure, South Africa has also pioneered strategies of stakeholder empowerment in corporate governance. Under orthodox corporate laws, only the corporation (acting through its managers) or shareholders suing derivatively may enforce directors’ duties. By contrast, South Africa’s Companies Act of 2008 also empowers unions and employees to enforce directors’ duties by initiating disqualification procedures and commencing derivative actions. The Act also grants a prominent role to labor by empowering trade unions and employees to ask the court to place the company in bankruptcy restructuring proceedings, requiring their consultation in the development of the business plan, and permitting them to address creditors at the meeting before the vote on the plan.
Moreover, Global South jurisdictions have pioneered efforts to promote diversity in corporate governance as a means to ease ethnic tensions and redress historical economic inequities across racial lines. While legal reforms seeking to advance corporate governance diversity in the Global North mostly emerged in the last two decades, Malaysia has boldly pursued affirmative action in corporate ownership for the benefit of the Malays since the 1970s. South Africa has pushed for greater Black ownership and empowerment in corporate governance since 2003 through its law on Broad-Based Black Economic Empowerment (B-BBEE), which sets targets for Black equity ownership, Black people in senior management, and procurement from Black firms, and promotes skills development and socio-economic development of Black people. The B-BBEE Act paid attention to intersectionality by listing as one of its key objectives that of “increasing the extent to which black women own and manage existing and new enterprises,” and specifically enabled the use of metrics that “distinguish between black men and black women.”
Heterodox stakeholderism in the Global South can be viewed as an institutional adaptation to environments of high inequality and insufficient state capacity to curb externalities and promote social welfare through other areas of law. This is the flip side of the traditionally dominant (but now rapidly declining) “modularity approach” to law and economics (as I examined here), which posits that each area of law should contribute to social welfare by focusing on one economic problem: for corporate law, the standard single objective is the reduction of agency costs associated with the corporate form. However, if other areas of law (such as tax, environmental, and antitrust laws) fail in accomplishing their objectives, the case for such a modular approach – which may not be optimal to begin with – falters accordingly. Heterodox stakeholderism in corporate law reflects precisely a challenge to this dominant modular approach.
In environments of rampant inequality and significant social and environmental degradation, the view that corporate law should focus exclusively on shareholder wealth maximization tends to lose legitimacy, if not economic justification. Limitations of state capacity in fighting inequality and mitigating externalities through other areas of law create both political and functional pressure on corporate law to address broader welfare objectives. These pressures, which have long been felt in the Global South, are now reaching the Global North. The resurgent interest in stakeholderism in the Global North constitutes a surprising form of “reverse convergence” in comparative corporate governance – with the Global North increasingly looking more like the Global South, rather than the other way around.
Heterodox stakeholderism in the Global South also underscores the distributional repercussions of corporate law rules. The distributional implications of corporate law rules can be significant, including along North-South lines, and help explain some forms of heterodox stakeholderism in the Global South. For instance, upholding the limited liability of parent companies for environmental harm caused in developing countries is not only questionable on efficiency grounds but also brings perverse distributional implications by favoring wealthy Global North companies and their investors at the expense of poor Global South victims. The erosion of limited liability of parent companies by Global South jurisdictions can be interpreted as a response to the regressive distributional effects of limited liability of parent companies across South-North lines.
The experience of Global South countries reveals a broader array of institutional arrangements aimed at protecting stakeholders and reducing inequality in corporate law, as well as in other areas of law – as I have shown in prior co-authored work on contract law and inequality in the Global South. It shows that institutional change is possible, but that corporate law reform is no panacea for deep economic and social problems. The jury is still out on which heterodoxies, if any, may be worth embracing in any given context. But there is clearly much to be gained by incorporating Global South’s struggles, experiences, and innovations into the picture. The fact that comparative scholarship is lacking serves as a barrier to learning from Global South experiences in the South and North alike. The novel challenges our global world is facing require the consideration of novel solutions. The experiences of countries like Brazil, South Africa, and India offer helpful and relevant data points.