Impact of Convergence on Corporate Regulation

A previous article discussed the convergence of corporate social responsibility (CSR)  and corporate governance over the last several decades of the 20th Century.  In order to understand the impact of the convergence of CSR and corporate governance on corporate regulation, one must first be familiar with the three most prominent regulatory systems found within the corporate governance landscape[1]:

  • Public Regulation: Rahim explained “public regulation” as denoting “the traditional form of regulation where public authorities set the relevant legislation or other forms of binding actions for the purpose of achieving public policy aims”.[2] The subject matter of the legislation and accompanying administrative rules including means for monitoring compliance and imposing sanctions to aid in enforcing these actions.  In many cases, private citizens and organizations are actively involved through various structures and means in the implementation of the rules established by the state; however, the ultimate responsibility for implementing these rules remains with the state.[3]
  • Self-Regulation: According to Rahim, “self-regulation is the opposite of public regulation” and is well defined by Black, who said that self-regulation is “the situation of a group of persons or bodies, acting together, performing a regulatory function in respect of themselves and others who accept their authority”.[4] In a self-regulatory system, “private parties take the responsibility for monitoring compliance, and public authorities usually do not interfere in the regulatees’ self-monitoring strategies”.[5]
  • Co-Regulation: In its widest sense, the term co-regulation means “cooperative forms of regulation that are designed to achieve public authority objectives—the cooperation being performed by public authority and civil society.”[6] In its narrowest sense, co-regulation means “the regulator and the regulatee are linked by a regulatory scheme designed to reach a public policy goal as well as to fulfil the interests of the regulatee”[7].  Rahim explained that a co-regulatory scheme combines elements of self-regulation, self-monitoring and traditional public regulation strategies; however, in actual practice the public authority generally lays down the the legal basis so that the system can begin to function and then private parties work to develop and implement the rules that describe its functioning.

Attempts to regulate corporate governance can be illustrated by the various corporate governance codes that have been adopted throughout Europe.  Szabó and Sørensen reviewed and analyzed the corporate governance codes of each of the European countries in the “EU27”, as well as the codes of Norway, Iceland and Switzerland, as of the end of 2011.[8]  Among the 30 codes, 21 addressed various stakeholder issues; 14 addressed ethical issues; and 15 addressed issues related to the social responsibility of the company or social and environmental matters. The researchers noted that the most common recommendations among the codes related to increasing transparency internally or externally as a means for facilitating CSR; however, apart from transparency most of the recommendations were vague and generally lacking in specifics, thus making them soft in character and frequently open to interpretation.

Rahim observed that the potential convergence of CSR and corporate governance has affected the modes of corporate regulation and that “hierarchical command-and-control” regulation dictated by the state is being replaced by a mixture of public and private, state and market, traditional and self-regulation institutions that are based on collaboration among the state, business corporations, and NGOs.[9]  In fact, Rahim argued that the impact of the convergence of CSR and corporate governance has mostly been reflected by the development of self-regulatory regimes in the business environment which include both attempts by organized groups to regulate the behavior of its members and efforts by individual companies to exercise control over themselves to maintain the stability of their function and achieve certain organizational goals.[10]  While self-regulation can be mandated or coerced by the state, most of the self-regulatory initiatives to date relating to CSR have been voluntary systems initiated and operated by corporations, often acting collectively with input from stakeholders.  All of this seems to be consistent with the erosion of the authority and power of the nation-state that has occurred due to globalization and the accompanying rise of the influence of non-state actors and transnational bodies in constructing regulatory schemes and devices for businesses.[11]

Rahim noted that individual companies have been self-regulating their CSR-related activities through their own codes of conduct and/or through incorporation of a multi-stakeholder initiative or guidelines prepared by another social or commercial organization.[12]  When corporations create their own codes of conduct they are simultaneously acting as both “regulator”, responsible for the rules, and the “regulate”, responsible for implementation of those rules.  Acting in this fashion provides the corporation with the flexibility to frame its own internal strategies for pursuit of broader public policy goals taking into account its specific circumstances and resources.  On the other hand, when corporations adopt technical and qualitative standards provided by multi-stakeholder initiatives and other external organizations, the regulator is separated from the regulate, although corporations are generally encouraged to get involved in standard-setting exercises to ensure that their concerns are heard and addressed.  While acting in this manner arguably increases the costs associated with implementation and compliance, it does provide corporations with the opportunity to access emerging best practices amongst their peers and enhance their brand and reputation by being associated with widely-respected standards.

G20/OECD Principles of Corporate Governance


Elements of CSR, including recognition of the rights of stakeholders along with shareholders and the need for regular and transparent reporting of the corporation’s governance practices and performance, found their way into the G20/OECD Principles of Corporate Governance, which call on corporations to:

·         Distribute duties and responsibilities among different supervisory, regulatory and enforcement authorities;

·         Protect and facilitate the exercise of shareholder rights and ensure equitable treatment of all shareholders, including minority and foreign shareholders;

·         Recognize the rights of stakeholders established by law or through mutual agreements and ensure that where stakeholder interests are protected by law that stakeholders have the opportunity to obtain effective redress for violation of their rights;

·         Encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises;

·         Permit mechanisms for employee participation to develop;

·         Ensure that stakeholders participating in the corporate governance process have access to relevant, sufficient and reliable information on a timely and regular basis and are able to freely communicate their concerns about illegal or unethical practices to the board and to the competent public authorities without compromising their rights;

·         Publish regular and accurate disclosure concerning the company’s financial situation, performance, ownership and governance that includes, among other things, company objectives and non-financial information in accordance with high quality standards including policies and performance relating to business ethics, the environment and, where material to the company, social issues, human rights and other public policy commitments; foreseeable risks factors including business conduct risks; and risks related to the environment; key issues relevant to employees and other stakeholders that may materially affect the performance of the company or that may have significant impacts upon them; and governance structures and policies, including the content of any corporate governance code or policy and the process by which it is implemented;

·         Implement a corporate governance framework that ensures the strategic guidance of the company, the effective monitoring of management by the board, the board’s accountability to the company and the shareholders and effective disclosures and communications to stakeholders; and

·         Ensure that the board applies high ethical standards and takes into account the interests of stakeholders through the adoption, implementation and enforcement of company-wide codes of conduct that serve as a standard for conduct by both the board and key executives and set the framework for the exercise of judgement in dealing with varying and often conflicting constituencies.

Source: Organisation for Economic Co-operation and Development, G20/OECD Principles of Corporate Governance, (Paris: OECD Publishing, 2015) 

The codes of conduct referred to above began to appear during the 1990s, often adopted by large companies with a strong presence in developing economies with weak state-based regulatory systems and companies engaged in sectors where brand reputation and export orientation were critical (e.g., apparel, sporting goods, toy and retail sectors, oil, chemicals, forestry and mining).[13]  In general, these codes addressed corporate ethics, moral guidelines, and key CSR issues like human rights, labor, the environment and sustainable development.[14]  Notably, the codes generally extended outward to include supply chain participants and included restrictions on doing business with suppliers that did not respect workers’ rights (e.g., freedom of association) and ensure fair pay and treatment for their workers.  Suppliers were also expected to support sustainability and use ethical practices to ensure their product quality and processing efficiency (e.g., refrain from using child labor and provide for environmentally-friendly manufacturing methods).  In many cases, companies supplemented their codes by providing training programs for suppliers and creating mandatory environmental management systems.[15]

Codes of conduct have been criticized as tools used by corporations to pursue their own interests rather than public policy goals and for failing to actually improve corporate behavior worldwide absent accompanying changes in business culture and decision making.[16]  Companies have also been criticized for creating codes of conduct that are complex and difficult to interpret and then ignoring them in practice or failing to ensure that they are prioritized through proactive communications from the independent directors and the members of the senior executive team.[17]  In turn, proponents of codes of conduct argue that the codes can positively affect sales, purchasing and recruitment of new staff, secure the company’s reputation, create innovation, increase motivation among their employees and improve risk management and compliance, all of which ultimately leads to the increased sustainability of their company.[18]  Codes of conduct have also been praised for their potential positive impact on internal governance including clarification of the company’s mission, values and principals and their value as a guide and source of reference for the day-to-day decision making of employees.

Rahim noted that another trend in self-regulation has been the growing attention to non-financial reporting, a trend that began in the 1990s in response to a series of environmental disasters and continued thereafter to expand to include a wider range of corporate policies and CSR-related issues.[19]  At the beginning, these reports primarily focused on informing the public of the company’s existing CSR policies; however, as time went by companies began to use the reporting process as a means for creating channels of communication with their stakeholders.  As this so-called sustainability reporting has become more sophisticated, incorporating metrics to be used to track the company’s CSR performance, it has become a driver of corporate governance practices and pushes boards toward considering and incorporating better mechanisms for long-term accountability to their constituencies.  While sustainability reporting has been largely voluntary, there is now a trend among legislators and regulators to require such reporting alongside traditional disclosures of financial results.

Rahim noted that both codes of conduct and non-financial reporting have been significantly influenced by external stakeholders eager to be involved in the formulation of codes and reporting practices and “supervise” the way in which businesses have chosen to self-regulate their CSR activities.  One important byproduct of all of this has been the development of a “standardization regime” (i.e., “an agreement based on the principles that guide the standards of activities”) in both areas including multi-stakeholder codes and principles used as guidelines for codes of conduct and reporting frameworks, such as the Global Reporting Initiative, available for consultation in presenting the content and results of CSR initiatives and programs.[20]  Rahim explained that the multi-stakeholder initiatives involved companies, trade unions and other workers’ associations, government agencies, NGOs and academics and included not only a framework of rules and guidelines for operations but also mechanisms for monitoring and verification and evaluation of the CSR performance of companies.

While standardization arguably undermines the latitude of businesses as to how they “self-regulate”, it does allow companies to demonstrate, through accepted performance measurement and reporting standards, their efforts towards fulfilling their social, economic, environmental and ethical responsibilities.[21]  Standardization also makes it easier to companies to implement certain CSR initiatives.  For example, Goyder and Desmond argued that companies that have integrated standards into their selection and management of strategic suppliers will be able to reduce their transaction costs, increase their profitability, reduce costs as a result of a reduced need to switch suppliers and increase their competitiveness in the marketplace through improved relationships with the ultimate consumers of their products.[22]

Williams explained the tensions between proponents of the traditional shareholder-focused model of corporate governance and those who have pushed the emerging stakeholder view of the corporation:

“In important respects corporate responsibility is both too strong and too weak: too strong an assertion of a social role for the corporation and its directors to coexist comfortably with the view of the purely economic role of the corporation within shareholder-focused corporate governance systems, and yet too weak for academics taking a stakeholder view of the corporation who are concerned with global problems they view companies as having helped to create, including climate change, environmental degradation, exploitative labor conditions and worsening economic inequality.”[23]

Williams noted that some stakeholder theorists have argued that the current version of “corporate responsibility”, which generally emphasizes disclosure and voluntarism, is too modest and has failed to make a significant impact on addressing human rights issues, many of which remain in an extreme form all around the world in the communities in which corporations continue to pursue their profit-making strategies.[24]  These theorists believe that even though much is made of the “business case” for “voluntary” corporate responsibility (i.e., acting responsibly enhances the “intangible” value of the corporation, which has been estimated to account for anywhere from 70% to 80% of total market value, by improving brand reputation and goodwill and creating intellectual property necessary for innovation), the reality is that substantial economic disincentives remain for corporations and that they are likely to be unwilling to incur higher labor costs and/or make expensive investments in pollution abatement unless there is a supportive regulatory framework that creates a level playing field for competition (i.e., all of the participants in the market will be required by law to increase wages and reduce the harm that their activities cause to the environment).[25]

After evaluating the arguments made by proponents of both the shareholder and stakeholder perspective, Williams pointed out that the proposition that corporations should stay out of the politics associated with making social policies made no real sense in a world in which businesses spend heavily on lobbying, litigating to narrow and adapt regulations to their benefit and contributing to electoral campaigns.[26]  As for the concerns about self-interested actions of directors if the stakeholder view was adopted, Williams stated that “the prioritizing of shareholders’ interests as it has been instantiated in the U.S. over the last three decades has itself masked self-interest and created new agency problems” and explained that stock option compensation that rewards managers for taking a short-term perspective has enriched executives while doing little to improve underlying corporate value.[27]  In addition, the need to appease activist investors has pushed management to engage in share buy-backs or special dividends, sales of premium assets, ill-advised mergers and acquisitions and increasing leverage that generally destroy longer-term value and cripple the ability of the corporation to invest in the sustainability of the business.  Moreover, the push to drive share prices upward has driven management of many businesses to engage in shady financial reporting practices.[28]

Williams then turned to the law relating to corporate governance itself, beginning with the long-standing argument that directors’ fiduciary duties flowed only to the shareholders and thus prohibited consideration of the interests of other constituencies.  If this were true then the stakeholder perspective was out of the question, barring a fundamental shift in duties that would presumably require legislative action.  On that point, Williams provided the following interpretation of the precedents of decisions by the Delaware Supreme Court from 1992 to 2004 by that Court’s former Chief Justice:

“[I]t is important to keep in mind the precise content of this “best interests” [of the corporate entity] concept—that is, to whom this duty is owed and when. Naturally, one often thinks that directors owe this duty to both the corporation and the stockholders. That formulation is harmless in most instances because of the confluence of interests, in that what is good for the corporate entity is usually derivatively good for the stockholders. There are times, of course, when the focus is directly on the interests of stockholders [citing Revlon and Paramount Comms. v. QVC]. But, in general, the directors owe fiduciary duties to the corporation, not to the stockholders. (Emphasis added)”[29]

Williams also argued that scholars such as Stout were correct that “the protection of the business judgment rule allows directors to make decisions that are in the longer-term interests of the corporation, such as investing in research and development, building new plants, or paying employees well, notwithstanding some shareholders who would rather have the company’s money spent on them”.[30]  The upshot of this position is that directors should not fear liability for breach of their fiduciary duties if they take actions that arguably frustrate the short-term interests of certain shareholders, such as pay employees more than the minimum wage required by law or reducing the prices on certain of its products so that more employees could buy those products.[31]

Based on her review of the case law and the opinions of a variety of scholars, Williams concluded that “… shareholders are important beneficiaries of fiduciary obligations in Delaware, of course, but only so long as their interests and the corporation’s long-term interests are in harmony. Corporate responsibility initiatives are one type of strategy to promote the corporation’s long-term financial well-being, as the empirical evidence shows, and thus there is no fiduciary breach”.[32]  Williams praised the corporate responsibility initiatives for the many ways in which they had improved conditions of employment, brought attention to environmental problems and motivated firms to develop innovative products and solutions to address these problems, and noted the empirical evidence that responsibility is generally a good business strategy; however, she cautioned that “corporate responsibility does not fundamentally change underlying power relationships between companies and citizens”; that companies can volunteer to act to address social and environmental problems—or not; and that corporate responsibility may dissuade governments from regulating, thus leaving gaping holes into which corporations may decide to march at great cost to the environment and the lives of millions of people around the world.[33]  Williams also noted that while economic development has improved the overall standard of living, billions of people would benefit from greater access to productive enterprise and it is important that the underlying normative and material conditions of that access matter be managed properly, a role that should not be left to corporations themselves.

For Williams, the solution was to seriously consider more “hard law” regulating social responsibility, thus giving directors more guidance for decisions in the area and satisfying those who have complained that corporate responsibility based primarily on disclosure is too weak, and she suggested that the best place to look for guidance would be the self-regulatory initiatives that businesses had already chosen to participate in.[34]  More regulation is allowed by economic theory when necessary to address market failures such as the negative externalities associated with irresponsible behavior of businesses and, as Williams pointed out, “[e]ven Friedman believed that business has an obligation to conform ‘to the basic rules of the society, both those embodied in law and those embodied in ethical custom’”.[35]  In addition, actions by governments to make environmental and social responsibility a legal obligation for businesses may be necessary in order to ensure that the positive changes associated with corporate responsibility become sustainable.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] The following summaries are adapted from the discussion in M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 25-27.

[2] Id. at 26.

[3] C. Palzer and A. Scheuer, “Self-Regulation, Co-Regulation, Public Regulation”, Promote or Protect (2003), 165.

[4] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 26 (citing J. Black, “Constitutionalising Self Regulation”, Modern Law Review, 59(1) (1996), 24, 27).

[5] Id. at 26.

[6] Id. at 26 (citing C. Palzer and A. Scheuer, “Self-Regulation, Co-Regulation, Public Regulation”, Promote or Protect (2003), 170).

[7] Id. at 26.

[8] D. Szabó and K. Sørensen, “Integrating Corporate Social Responsibility in Corporate Governance Codes in the EU”, European Business Law Review, 2013(6), 1.

[9] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 23 (citing A. Gill, “Corporate Governance as Social Responsibility: A Research Agenda” (2008), 464).

[10] Id.

[11] Id. at 27 (citing J. Cioffi, “Governing Globalisation? The State, Law, and Structural Change in Corporate Governance”, Journal of Law and Society, 27(4) (2000), 572).

[12] Id.

[13] Id. at 29 (citing H. Arthurs, “Private Ordering and Workers’ Rights in the Global Economy: Corporate Codes of Conduct as a Regime of Labour Market Regulation”, Labour Law in an Era of Globalisation: Transformative Practice and Possibilities (2005), 471; and United Nations Research Institute for Social Development, Corporate Social Responsibility and Business Regulations: How should Transnational Corporations be Regulated to Minimise Malpractice and Improve their Social, Environmental and Human Rights Record in Developing Economies? (2004), available at at 29 June 2010).

[14] E. Wymeersch, “Corporate Governance Codes and their Implementation” (Gent University, 2006).

[15] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 29-30.

[16] Id. at 30 (citing A. Blackett, “Global Governance, Legal Pluralism and the Decentered State: A Labour Law Critique of Codes of Corporate Conduct”, Indiana Journal of Global Legal Studies, 8 (2000), 401; and R. Locke and M. Romis, Beyond Corporate Codes of Conduct: Work Organisation and Labour Standards in Two Mexican Garment Factories (2006)).

[17] See, e.g., P. Smalera, “The valley’s mess: why codes of conduct don’t work”, Fortune (September 1, 2010)

[18] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 31.

[19] Id. at 31.  For further discussion of the evolution of voluntary sustainability reporting, see A. Kolk, “Sustainability, Accountability and Corporate Governance: Exploring Multinationals’ Reporting Practices”, Business Strategy and the Environment, 17(1) (2008), 1; D. Hess, “Social Reporting and New Governance Regulation: The Prospects of Achieving Corporate Accountability through Transparency”, Business Ethics Quarterly, 17 (2007), 455, 458; and J. Elkington, The Triple Bottom Line for 21st-Century Business, The Earthscan Reader in Business and Sustainable Development (2001).

[20] Id. at 32.

[21] Id. at 33.

[22] Id. at 34 (citing M. Goyder and P. Desmond, Is Ethical Sourcing Simply a Question of Good Supply Chain Management?”, Visions of Ethical Sourcing (2000), 28).

[23] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 4, available at

[24] Id. at 39.

[25] Id. at 40.  Williams also noted that the business case for corporate responsibility depends on several other assumptions that have yet to be empirically confirmed such as consumers being willing to pay more for goods produced in socially-responsible fashion, employees being selective about where they will work and choosing only the most responsible employers, and investors generally investing and disinvesting based on social parameters; however, as time goes by more and more studies are appearing that provide support for the reasonableness of these assumptions.

[26] Id. at 44.

[27] Id. at 49-50.

[28] Id. at 50-51.

[29] Id. at 47 (citing E. Norman Veasey and C. DiGuglielmo, “What Happened in Delaware Corporate Law and Governance from 1992-2004?: A Retrospective on Some Key Developments”, University of Pennsylvania Law Review, 153 (2005), 1399, 1431).

[30] Id. at 47 (citing L. Stout, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (2010)).

[31] Id. at 48.  Henry Ford’s decision to reduce the cost of the cars sold by Ford Motor Company, in part so that more of its employees could buy them, was the fact pattern in the much discussed case of Dodge v. Ford, 204 Mich. 459, 170 N.W. 668 (1919).  In that case, the Michigan Supreme Court provided the oft-quoted language in its opinion that “[a] business corporation is organized and carried on primarily for the profit of its stockholders”; however, Williams pointed out that the quote was dicta and that the Court ultimately refused to enjoin Ford’s plans, finding them to fall within the protected scope of the business judgment rule.  Williams argued that the opinion of the Court could be cited as support for the view that “there is great latitude for company directors to act to promote the welfare of their employees, the communities in which they operate, their customers and suppliers, or even the environment, but only so long as there is a plausible justification for how that advances the company’s long-term financial well-being”. Id.

[32] Id. at 49.

[33] Id. at 54-55.

[34] Id. at 53.

[35] Id. at 52 (citing M. Friedman, “The Social Responsibility of Business is to Increase its Profits”, New York Times Magazine (September 13, 1970), 6).  See also Section 2.01(b) of the American Law Institute’s Principles of Corporate Governance and Structure: Analysis and Recommendations, which provides that: “Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business: (1) is obliged, to the same extent as a natural person, to act within the boundaries set by law; (2) may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business; and (3) may devote a reasonable amount of resources to public welfare, humanitarian, educational and philanthropic purposes.”

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