The dominant view of Anglo-American corporate law and corporate law jurisprudence is that the primary purpose of the corporation is to maximize shareholders’ gains. Under this view, the corporation is conceptualized as a nexus of contracts, primarily between shareholders and directors: shareholders are thought of as the owners of the company, and directors are thought to run the company chiefly in shareholders’ interest. The separation of ownership and control is thus often depicted as the main challenge for corporate law. Thus, corporate law is designed primarily to offer the parties default mechanisms to minimize agency costs.
In recent years, other approaches to corporate law have been proposed. One such view is the stakeholder theory of the corporation, which aims to bring to the fore the interests of other groups tied to the corporation and influenced by it. Rather than thinking of the shareholders as the owners of the corporation, the stakeholder theory takes a broader perspective of the corporation, aiming to embed the company in society and to view it as a social institution, rather than merely an economic one. This view of the corporation, while gaining some ground among various academics, is still marginalized in law.
The shareholder primacy view, coupled with the understanding that the corporation is predominantly an economic institution, rests on two assumptions regarding the human condition and the nature of social arrangements. First is what vulnerability theory refers to as the “liberal subject,” the idea that persons are autonomous, rational, independent, self-sufficient, and self-interested individuals, who have the ability to negotiate contracts, take calculated risks, assess options, and rationally choose between them. The second assumption is the neoliberal separation of the market from the state, and of the economy from power structures and from questions of justice and fair distribution. One implication of these assumptions is the affirmation of the public-private divide, which emphasizes the responsibility of the state to secure and foster the public interest while setting the private sector free to promote self-interest. The result is that classical corporate law focuses on shareholders’ contractual and proprietary interests as owners of the corporation. Classic corporate law thus neglects to respond to the interests and needs of other persons and communities whose relations to the corporation are not as free or chosen as those of the shareholders but are nonetheless affected by it.
Vulnerability Theory and Corporate Law: a New Perspective
In this post, we offer a different framework within which to think about corporate law. Questioning the economy-society split—a fundamental assumption of neoliberalism—and drawing on vulnerability theory, which focuses on the appropriate social response to human vulnerability, we call to place at the center of corporate law not the liberal subject, but the vulnerable one. We argue that focusing on the universal human condition of vulnerability—rather than on an imagined state of autonomy and self-sustenance—would allow corporate law to respond to the harm caused by corporate irresponsibility and to instill resilience in persons as a response to corporate power. By thinking about corporate law from the perspective of vulnerability, we draw attention to a blind spot of current corporate jurisprudence: thinking about law as a mechanism for allocating resilience.
Questioning Shareholders as Corporate Owners and the Private-Public Divide
Vulnerability analysis prompts a focus on the corporation as a site of social and economic power. To illustrate this, we call into question the idea that shareholders are the firm’s owners (and, accordingly, that the principal-agent relation is one of the key issues for corporate law to attend to), as well as the alleged benefits of the public-private divide for corporate law.
Viewing the corporation as a site of social and economic power brings to the forefront of corporate law the understanding that corporations are socially embedded institutions that allocate resilience. It further allows us to realize that under current legal doctrine, the principal recipients of that resilience are shareholders. For others—workers, consumers, communities or even the environment—corporate law allows large corporations to preserve, and sometimes even expose or exacerbate, vulnerability. This, in turn, allows us to go back to basics, and re-assess the fundamental concepts of corporate law in a new light. For example, we can re-examine the broader social benefits of considering shareholders as the owners of the corporation and the sensibility of focusing on minimizing the agency costs between managers and shareholders. Moving beyond doctrinal legal questions in this regard (do shareholders possess and exercise control over the corporation in an owner-like manner, for example), vulnerability theory brings to the fore broader questions of resilience allocation: how fair or how normatively appropriate is it to consider shareholders as the owners of the company; is it the best way to avoid exploiting the vulnerability of other groups who are involved, and harmed, by corporate recklessness; does that bring us closer to a better distribution of resilience through law; or does it instead afford more resilience to those who already possess it, at the expense of others, who are in greater need of social tools to confront their vulnerability? Thinking about the ownership of the corporation through these questions may lead to a range of alternative conclusions: it could be better, for instance, to think about the corporation as an ownerless institution. It may also be the case that shareholders are not the most in need of support for resilience against loss and deserving of prominent standing within corporate law. Rather, it may be the case that shareholders should be considered as one group whose interests can be considered and weighed against those of other groups, such as workers or the environment.
Replacing the liberal subject with the vulnerable one, and the responsive state with the restrained one, exposes the ways in which current corporate jurisprudence is blind to the allocation of resilience and to the distribution of assets and advantages in society. Introducing vulnerability theory to corporate law may therefore help to re-imagine corporate law to ensure that all stakeholders have equal access to the corporation’s resources and assets.
The proposed shift in attention under vulnerability theory—away from concepts such as “contract” and “consent” towards confronting actual vulnerability—has significant implications for the public-private divide as well. Indeed, once addressing persons’ universal and unremitting vulnerability is seen as key to institutional design, the delineation between public and private becomes less obvious. A socially embedded institution—public or private—can either exploit vulnerability and perpetuate societal power imbalances or afford the resources to enable resilience. Under vulnerability theory, both private entities and public institutions are legal constructs, the main task of which is to respond to persons’ vulnerability.
The focus of vulnerability theory—the vulnerable subject, the responsive state, and the allocation of resilience—form an operative framework within which to understand corporate law in a more inclusive fashion and provides the theoretical grounding for a more stakeholders-oriented theory of corporate law. Whereas the shareholder primacy norm, and the view that shareholders are the owners of the company and the risk-takers in its endeavors, positions the interests of shareholders above those of other constituencies. However, the understanding that all persons are vulnerable, emphasized by the ongoing COVID-19 pandemic, is clearer now than ever before. The risk to be acknowledged, therefore, is not limited to risk-by-choice that the law currently acknowledges. Rather, it mandates that we construct different institutions – the corporation among them – to better allocate resilience. Rethinking corporate law in a socially embedded fashion, and focusing on the responsive state rather than on the market as a neutral zone, offers, we believe, a more adequate theoretical foundation upon which to construct an inclusive corporate law.