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For-profit, non-profit, and hybrid : the global emergence of legally 'good' corporations and the Canadian… Liao, Carol 2016

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 FOR-PROFIT, NON-PROFIT, AND HYBRID: THE GLOBAL EMERGENCE OF LEGALLY ‘GOOD’ CORPORATIONS  AND THE CANADIAN EXPERIMENT  by    Carol Liao    LL.M., The University of British Columbia, 2010   LL.B., The University of British Columbia, 2003 B.A. (Honours), Queen’s University, 2000    A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF     DOCTOR OF PHILOSOPHY    in    THE FACULTY OF GRADUATE AND POSTDOCTORAL STUDIES   (Law)    THE UNIVERSITY OF BRITISH COLUMBIA  (Vancouver)    October 2016       © Carol Liao, 2016        FOR-PROFIT, NON-PROFIT, AND HYBRID: THE GLOBAL EMERGENCE OF LEGALLY ‘GOOD’ CORPORATIONS  AND THE CANADIAN EXPERIMENT  by    Carol Liao    LL.M., The University of British Columbia, 2010   LL.B., The University of British Columbia, 2003 B.A. (Honours), Queen’s University, 2000    A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF     DOCTOR OF JURIDICAL SCIENCE     in    THE SCHOOL OF GRADUATE STUDIES   (Law)    UNIVERSITY OF TORONTO  (Toronto)    October 2016       © Carol Liao, 2016  iii  ABSTRACT There are mounting expectations for corporations to play a role in overcoming barriers to sustainability and socio-economic development. The explosion of social enterprises in the last decade has spawned a new generation of alternative corporations. Legislators across the world are crafting new laws to meet growing demands from social entrepreneurs seeking legal infrastructure to house their social businesses. “Hybrid” corporations blend for-profit and non-profit legal characteristics in their design, enabling and, at times, requiring businesses to pursue dual economic and social mandates. Some hybrids have been met with relative success in their home nations, others have not. The emergence of hybrid corporations challenges the foundational principles of corporate law and shareholder wealth maximization, as well as the nature of the non-profit organization.  Corporate hybridity has received little scrutiny in scholarship to date as it is a relatively new institutional phenomenon. This dissertation situates hybrids within the broader context of neoclassical corporate legal theory. The underlying hypothesis is to test whether the creation of hybrids will contribute to the advancement of the social economy to a greater extent than if such entities did not exist. Part One provides historical background on the development and evolution of the shareholder primacy model of governance, both in theory and in practice, and whether there has been global convergence of this model. It explores some of the leading critiques and counter-hegemonic discourses to shareholder primacy and limitations to its reform, as well as the challenges facing the non-profit sector and resulting global emergence of hybrid legal structures. Part Two shifts the focus to Canada, a unique country to study corporate hybridity as some international hybrid forms have been adopted or are being considered. This critical juncture in Canadian corporate history serves as a live experiment on the utility of hybrids. Using qualitative   iv  empirical data, this dissertation positions a Canadian model of corporate governance within the international dialogue, and provides early lessons on whether hybrids can serve as catalysts in growing the social economy. Implementation strategies are provided for both domestic and international legislators who are interested in creating new laws to support burgeoning social enterprises.     v  PREFACE This dissertation is formatted in accordance with the regulations of the University of British Columbia and submitted in partial fulfillment of the requirements for a PhD degree awarded jointly by the University of British Columbia and the University of Toronto. Versions of this dissertation will exist in the institutional repositories of both institutions. This dissertation is an accumulation of several years’ work in the field of corporate law, legal theory, hybrid corporations, social enterprise law, and social innovation. Previous drafts of portions of this dissertation have appeared in the following publications: An earlier version of Sections 1.2 – 1.5 appeared in “Corporate Governance Reform for the 21st Century: A Critical Reassessment of the Shareholder Primacy Model” (2012) 43(2) Ottawa Law Review 187-232 (peer-reviewed).  An earlier version of Sections 2.2 and 4.1 – 4.3 appeared in “Limits to Corporate Reform and Alternative Legal Structures” in Dr. Beate Sjåfjell and Dr. Benjamin Richardson, eds., Company Law and Sustainability: Legal Barriers and Opportunities (Cambridge University Press, 2015) at 274-311. Figure 1 will appear in “The Changing Face of the Non-Profit Sector: Social Enterprise Legislation in British Columbia” in Nick Mulé and Gloria DeSantis, eds., The Shifting Terrain: Public Policy Advocacy in Canada (Montreal: McGill-Queen’s University Press, forthcoming 2017) (peer-reviewed). An earlier version of Chapter 5 and Appendix B appeared in “A Canadian Model of Corporate Governance” (2014) 37:2 Dalhousie Law Journal 559-600 (peer-reviewed); originally the 2013 Robert Bertram Doctoral Research Award Report, Canadian Foundation for Governance Research (November 2013); reprinted in Corporate and Financial Law: Interdisciplinary Approaches eJournal, James A. Fanto and Lawrence E. Mitchell, eds., Vol. 9, No. 60 (5 December 2013).  An earlier version of Section 7.3 appeared in “Disruptive Innovation and the Global Emergence of Hybrid Legal Structures” (April 2014) 11:2 European Company Law 67-70 (peer-reviewed); University of Oslo Faculty of Law Research Paper No. 2014-16. An early stage framework of this dissertation formed the basis for my ideas in “The Next Stage of CSR for Canada: Transformational Corporate Governance, Hybrid Legal Structures, and the Growth of Social Enterprise” (2013) 9 McGill International Journal of Sustainable Development Law and Policy 53-85 (peer-reviewed); reprinted in the Canadian Law eJournal, Anita Anand, ed., Vol. 9, No. 40 (13 June 2013).   vi  The fieldwork reported in Chapter 5 and Appendix B was covered by UBC Ethics Certificate number H12-03615, entitled “Robert Bertram Project.” Footnotes conform to the Canadian Uniform Guide to Legal Citation (McGill Guide), 8th ed. (Thomson/Carswell, 2014).     vii  TABLE OF CONTENTS  ABSTRACT ................................................................................................................................... iii  PREFACE ....................................................................................................................................... v  TABLE OF CONTENTS .............................................................................................................. vii  LIST OF TABLES ......................................................................................................................... xi  LIST OF FIGURES ...................................................................................................................... xii  GLOSSARY ................................................................................................................................ xiii ACKNOWLEDGMENTS ........................................................................................................... xvi DEDICATION ............................................................................................................................. xix  INTRODUCTION .......................................................................................................................... 1  PART ONE: Corporate Legal Theory and the Rise of Legally ‘Good’ Corporations .................. 14 CHAPTER 1: Anglo-American Corporate Legal Theory in Context ........................................... 14  1.1 Economic Efficiency and Nexus of Contracts .............................................................. 15 1.2 Shareholder Primacy and the Separation of Ownership and Control ........................... 25 1.3 Three Perspectives Emerging After “End of History” .................................................. 34 1.4 Ascendancy of Behavioural Approaches ...................................................................... 40 1.5 Perspectives in the Aftermath of the Global Financial Crisis ....................................... 46 1.6 Global Convergence Debate ......................................................................................... 51 1.6.1 Convergence is Likely ............................................................................................ 52 1.6.2 Convergence is Unlikely or Irrelevant .................................................................... 56 1.6.3 Considering the Empirical Evidence ...................................................................... 59 1.6.4 A Middle Ground .................................................................................................... 63 1.7 Shareholder Primacy Then and Now ............................................................................ 64  CHAPTER 2: Critiques to Shareholder Primacy and Limits to Reform ...................................... 67 2.1 Critiques to Shareholder Primacy ................................................................................. 67 2.1.1 Stakeholder Theory and CSR.................................................................................. 70 Codified CSR: United Kingdom’s Enlightened Shareholder Value ............... 80 Socially Responsible Investment ..................................................................... 83 2.1.2 Progressive Corporate Law ..................................................................................... 90 2.1.3 Team Production Theory ........................................................................................ 94 2.2 Limitations to Reforming the For-Profit Corporation ................................................ 101   viii  2.2.1 Entrenched Ideological Beliefs ............................................................................. 101 Shareholder Wealth Maximization Benefits Society ..................................... 101 Stakeholder Interests Adequately Protected by Law and Market Forces ...... 105 Shareholder Primacy is Superior to Alternatives .......................................... 106 2.2.2 Path Dependence ................................................................................................... 109 2.3 Critiques, Challenges, and Barriers ............................................................................ 112  CHAPTER 3: The Non-Profit Dilemma ..................................................................................... 114  3.1 The Nature of the Non-Profit Firm ............................................................................. 116 3.2 Practical Realities: Financial Impediments and Advocacy Chill ................................ 123 3.3 Growth of the Social Enterprise .................................................................................. 132  CHAPTER 4: Global Emergence of Hybrid Corporate Legal Structures .................................. 137 4.1 United Kingdom: Community Interest Company ....................................................... 139 4.2 Canada: Community Contribution Company ............................................................. 143 4.3 United States ............................................................................................................... 152 4.3.1 Low-Profit Limited Liability Company ................................................................ 152 4.3.2 B Corporation (Privately Regulated) .................................................................... 156 4.3.3 Benefit Corporation .............................................................................................. 162 4.4 The Future of the Hybrid Sector ................................................................................. 167  PART TWO: The Canadian Hybrid Experiment and Early Lessons ......................................... 170 CHAPTER 5: A Canadian Model of Corporate Governance ..................................................... 170 5.1 Examining the Legal Principles of Canadian Corporate Governance ........................ 175 5.1.1 Control of the Corporation .................................................................................... 176 Poison Pill Debate ......................................................................................... 178 5.1.2 Manage in the Best Interests of Whom? ............................................................... 183 5.1.3 Consideration of Stakeholder Interests ................................................................. 188 Peoples and BCE Decisions .......................................................................... 189 Good Corporate Citizen ................................................................................. 201 Influential to Practice? ................................................................................... 203 Extent of Consideration: May, Should, or Obligated? .................................. 206   ix  5.1.4 Protection for Minority Shareholders ................................................................... 209 5.1.5 Principal Measure of Shareholder Interests .......................................................... 213 5.2 Canadian Legal and Regulatory Landscape ................................................................ 215 5.2.1 Inadequacy of Legislators and Courts as Governance Leaders ............................ 215 5.2.2 Guidance from Securities Commissions ............................................................... 218 5.2.3 Other Players ......................................................................................................... 223 Toronto Stock Exchange ............................................................................... 224 Shareholder Advisory Groups ....................................................................... 226 5.3 Looking Ahead............................................................................................................ 228  CHAPTER 6: Canada’s Role in the Hybrid Game ..................................................................... 236  6.1 Challenges in the For-Profit Sector: Considering the Benefit Corporation ................ 237 6.1.1 CSR in Canada ...................................................................................................... 248  6.2 In Search of the Winning Ticket ................................................................................. 255 6.2.1 Continued Growth for Existing Hybrids: Cooperative Ownership....................... 256 6.2.2. If Implementing a Hybrid, Properly Invest: BC C3 .............................................. 263 6.2.3 Enact Meaningful New Hybrids ........................................................................... 266 6.3 The Way Forward ....................................................................................................... 268  CHAPTER 7: Corporate Law as a Tool to Advance Socio-Economic Development ................ 271  7.1 Why the Hybrid? ......................................................................................................... 272 7.1.1 Moving Beyond the For-Profit Corporation ......................................................... 274 7.1.2 Market Forces Are Not Enough ............................................................................ 286 7.1.3 Challenges with Tax Law Reform ........................................................................ 287 7.1.4 Partnering with Environmental Regulation .......................................................... 291 7.1.5 Easing the Non-Profit Dilemma............................................................................ 295 7.2 Framework for Strategic Implementation of Hybrids ................................................. 297 7.2.1 The Need Must Be Accurately Identified ............................................................. 297 7.2.2 The Law Must Make Sense................................................................................... 298 7.2.3 Economics and Incentives Must Make Sense ....................................................... 299 Invisible Hand as a Helping Hand ................................................................. 300 There Must Be a Critical Mass of Early Adopters and Supporters ............... 301   x Marketing and Brand Awareness .................................................................. 303 Vehicle Must be Self-Perpetuating ................................................................ 303 7.2.4 Question of Regulation ......................................................................................... 304 7.2.5 Consistently Ask: What is the Ultimate Goal? ..................................................... 306 7.3 Innovative Potential .................................................................................................... 306  CONCLUSION: Corporate Law for a Changing World ............................................................ 311 BIBLIOGRAPHY ....................................................................................................................... 315  1. Legislation and Regulations ........................................................................................ 315 2. Case Law ..................................................................................................................... 316 3. Government Documents and Online Sources ............................................................. 317 4. Secondary Sources – Books and Book Chapters ........................................................ 319 5. Secondary Sources – Articles ..................................................................................... 324 6. Other Sources .............................................................................................................. 336  APPENDICES ............................................................................................................................ 345    xi  LIST OF TABLES Table 1: Features of the BC Community Contribution Company……………………………...143     xii  LIST OF FIGURES Figure 1: Anglo-American hybrid legal structures……………………………………………..135     xiii  GLOSSARY AMF Autorité des Marchés Financiers AUM Assets under management BIS UK Department for Business Innovation & Skills BCE BCE Inc. v 1976 Debentureholders C3 or CCC Community Contribution Company CBSR Canadian Business for Social Responsibility CCGG Canadian Coalition for Good Governance CEO Chief Executive Officer CIC Community Interest Company CII Council of Institutional Investors CBCA Canada Business Corporations Act CRA Canada Revenue Agency CSA Canadian Securities Administrators CSGVP Canada Survey of Giving, Volunteering and Participating CSR Corporate social responsibility ESG Environmental, Social, Governance ESV Enlightened Shareholder Value EU European Union GDP Gross domestic product GFC Global financial crisis GSA Glass-Steagall Act ICA International Cooperative Alliance    xiv  ICGN International Corporate Governance Network ISS Institutional Shareholder Services Inc. IRS Internal Revenue Service ITA Income Tax Act (Canada) L3C Low-profit limited liability company LLC Limited liability company M&A Mergers and acquistiions MI 61-101 Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions  MNE Multinational enterprise NIE New institutional economics NP 62-202 National Policy 62-202 Take-Over Bids – Defensive Tactics NPO Non-profit organization NSGVP National Survey of Giving, Volunteering and Participating NSNVO  National Survey of Nonprofit and Voluntary Organizations OECD Organization for Economic and Cooperative Development OSC Ontario Securities Commission PHS Portland Hotel Society PLR Private letter ruling PRI Program-related investment SCC Supreme Court of Canada   xv  SE LLC Social Enterprise Limited Liability Company SMB Small and medium-sized business SOX Act Sarbanes-Oxley Act of 2002  SPC Social purpose corporations SRI Socially Responsible Investment TMX TMX Group Ltd. TSX Toronto Stock Exchange UK United Kingdom UN United Nations UN PRI United Nations Principles of Responsible Investment US United States      xvi  ACKNOWLEDGMENTS Before academia, I practised corporate law in New York. Now with three children, my doctoral studies drawing to a close, and my second year as an assistant professor at the University of Victoria Faculty of Law before me, I reflect on the path that got me here with some bewilderment. Much had to do with timing and sheer luck. More had to do with mentors that were willing to invest in my future, and family and friends that supported me.  I want to first thank my doctoral committee for their time, thoughtful feedback, and guidance throughout this dissertation project. I am very lucky to have had Professor Janis Sarra and Professor Anita Anand as my co-supervisors in this joint doctoral degree with the University of British Columbia and the University of Toronto. I offer my gratitude to Professor Sarra, who encouraged me to find my own voice as a scholar and has supported me for a countless number of years. I am grateful to Professor Anita Anand for all her insights and advice, and who, along with Professor Sarra, has been an inspiring example to me on how to excel as academic while remaining highly connected to industry and still very involved in family life. I give my sincere thanks to Professor Ian Lee for his astute reflections and particularly challenging and incisive questions that raised the caliber of my research. Finally, my deep gratitude goes to Professor Benjamin Richardson, whose continual involvement in my research and career has left an indelible mark and changed the course of my life. He is a world-class researcher, teacher, and changemaker, and I hope one day to be even half the scholar he is. His generosity to me over the years leaves me humbled, and I intend to pay it forward to my students.  In addition to my committee, a number of other mentors helped to shape my thinking and arrive at this point in my dissertation and career. I’d like to specifically thank Professor Cristie Ford, Professor Gordon Christie, Stan Magidson, George Casey, the Honourable Madam   xvii  Justice Risa Levine, Professor Emeritus John Hogarth, Vickie Cammack, Coro Strandberg, Christie Stephenson, and Professor Beate Sjåfjell, for taking chances on me and opening doors for me over the years. My gratitude as well goes to Professor Jutta Brunnée and Professor Douglas Harris for their collaborative support in this unique joint doctoral degree across institutions. I would also like to thank my friends and colleagues at the University of Victoria Faculty of Law, who have been immensely supportive of my research and growth as a teacher and scholar.  Part Two of this dissertation addresses the current Canadian corporate governance landscape and its relevance to the implementation of hybrid corporate legal structures in Canada. I gratefully acknowledge the following Canadian senior legal practitioners who kindly and generously contributed their time and expertise to my findings in Part Two, particularly Chapter 5: William M. Ainley, Davies Ward Phillips & Vineberg LLP; Rita C. Andreone, Q.C., Lawson Lundell LLP; Jeff Barnes, Borden Ladner Gervais LLP; Noralee Bradley, Osler, Hoskin & Harcourt LLP; William J. Braithwaite, Stikeman Elliot LLP; Terrence Burgoyne, Osler, Hoskin & Harcourt LLP; Rob Collins, Blakes, Cassels & Graydon LLP; Douglas G. Copland, Borden Ladner Gervais LLP; Dallas L. Droppo, Blakes, Cassels & Graydon LLP; Aaron S. Emes, Torys LLP; Jean Fraser, Osler, Hoskin & Harcourt LLP; Sharon C. Geraghty, Torys LLP; Mitchell H. Gropper, Q.C., Farris, Vaughn, Wills & Murphy LLP; Stephen Halperin, Goodmans LLP; Carol Hansell, Hansell LLP; Doug H. Hopkins, Boughton Law Corporation; Michael L. Lee, Lawson Lundell LLP; Robert Lehodey, Q.C., Osler, Hoskin & Harcourt LLP; Jon Levin, Fasken Martineau DuMoulin LLP; Andrew J. MacDougall, Osler, Hoskin & Harcourt LLP; R. Hector MacKay-Dunn, Q.C., Farris, Vaughn, Wills & Murphy LLP; Margaret C. McNee, McMillan LLP; D. Shawn McReynolds, Davies Ward Phillips & Vineberg LLP; William K. Orr, Fasken   xviii  Martineau DuMoulin LLP; Barry J. Reiter, Bennett Jones LLP; Simon A. Romano, Stikeman Elliot LLP; Richard A. Shaw, Q.C., ICD.D., Richard A. Shaw Professional Corporation; John Smith, Lawson Lundell LLP; Rene R. Sorell, McCarthy Tétrault LLP; Edward J. Waitzer, Stikeman Elliot LLP; Tom Theodorakis, McMillan LLP; and Marvin Yontef, Stikeman Elliot LLP. I gratefully acknowledge the financial support I received during my graduate studies from the Canadian Foundation for Governance Research, Mitacs Accelerate and industry sponsor Vancity Savings and Credit Union, the Social Sciences and Humanities Research Council, and the University of British Columbia.  Lastly, I could not have completed this dissertation without the support of my family. Thank you in particular to Susan Liao, Steve Liao, Diana Liao, Roger Liao, Daniel Fogden, Heather Fogden, Lawrence Chen, Yuri Tei, Jacqueline Love, Patricia Carlton, Ivan Szasz, and other family and friends that I have depended on over the years which are too numerous to list. I am grateful to you all. Most of all, I want to thank my wonderful and always supportive husband, Kyle Fogden, and our hilarious girls, Lucy, Skye, and Hannah. Thank you for being my greatest happiness.      xix  DEDICATION  To my mom, Susan Liao   1  INTRODUCTION An ongoing environmental crisis, an escalating demand for greater worldwide sustainability, and an imperative to strengthen the social economy have pushed public funds to their limits. Climate change, ecosystem collapse, unemployment/underemployment, biodiversity loss, fiscal crises – in 2015, these were named as some of the most significant long-term risks to the world by the World Economic Forum.1 Rising socio-economic inequality has led to the world’s richest 85 people having as much wealth as 3.5 million of the poorest.2 Increasingly complex economic, societal, geopolitical, environmental, and technological challenges have accelerated the search for new and sustaining relationships to bind our global community. The laws and principles controlling our human organization have wide application to our treatment of these challenges, yet corporate law traditionally has not been viewed as a useful tool to advance the social economy, as any contributions from corporations have always been excluded from estimations of the social economy’s size and scope.3 The social economy has been labeled in a variety of ways, such as the third sector, not-for-profit sector, alternative economy, and voluntary sector, but generally, it can be seen as a “robust organizing framework” that mobilizes economic resources towards the social and economic needs of individuals and communities.4 The importance of the social economy is profound, but as an essentially contested concept, quantifying its significance has been difficult to do without drawing controversies over                                                  1 World Economic Forum, “2015 Global Risks Report,” online: World Economic Forum <>. 2 Laura Shin, “The 85 Richest People in the World Have as Much Wealth as 3.5 Billion Poorest,” online: Forbes <>. 3 See Jorge Sousa & Evelyn Hamdon, “Preliminary Profile of the Size and Scope of the Social Economy in Alberta and British Columbia” (14 September 2010) B.C.–Alberta Social Economy Research Alliance, online: <>. 4 Ibid.   2  its interpretation. Nevertheless, there is consensus that strengthening and expanding the social economy is critical in overcoming local and global challenges to socio-economic development and sustainability.5 Our global awareness of the risks at hand has resulted in mounting expectations for corporations to transform, innovate, and play a role in lessening the risks.6 Now more than ever, there is a pressing need to reap the benefits of sustainable governance from the private sector.  The concept of “shareholder primacy” is deeply rooted within the Anglo-American corporation’s organizational design – pursuing anything other than shareholder wealth is tantamount to bad governance.7 For a long while this meant putting shareholder interests first, and ignoring the negative externalities that came with increasing share value. Social gains that occurred as a result of corporate actions were regarded as ancillary or subordinate to the primary goal of profit-making.8 It was not until the turbulent financial times of the 1980s that thinking began to change. The unpredictable economic environment led to the rise of reactionary business models specifically addressing the interests of non-shareholder stakeholders. The development of stakeholder theory and inclusion of stakeholders in corporate decision making – such as employees, consumers, creditors, community, and the environment – became good strategic management for increasing share value, and thus it did not work against the shareholder wealth                                                  5 See e.g., Frank Moulaert & Oana Ailenei, “Social Economy, Third Sector and Solidarity Relations: A Conceptual Synthesis from History to Present” (2005) 42 Urban Studies 2037; Laurie Mook, Jack Quarter, & Sherida Ryan, eds., Researching the Social Economy (Toronto: University of Toronto Press, 2010). 6 See e.g., David A Lubin & Daniel C Esty, “The Sustainability Imperative” (May 2010) Harvard Business Review 2. 7 Adolf Berle & Gardiner Means, The Modern Corporation and Private Property, Revised ed (New York: Harcourt Brace and World, 1967). 8 See e.g., Milton Friedman, “The Social Responsibility of Business is to Increase its Profits” The New York Times Magazine (13 September 1970).   3  maximization norm.  In the 1990s, the scholarly discussion in vogue within corporate legal circles was whether there had been global convergence to the shareholder primacy model. This discussion reached its pinnacle in 2001, with Henry Hansmann and Reinier Kraakman’s provocative work, “The End of History for Corporate Law,” which persuasively argued that the shareholder primacy model of governance was here to stay and other alternative models of governance had been tried and had failed. The corporate accounting scandals of 2001-2002 subsequent to Hansmann and Kraakman’s article, and the global financial crisis that began in 2008, shook the corporate world but added little ammunition to those who disagreed with Hansmann and Kraakman’s position.  The rapid growth of corporate social responsibility (CSR) in recent decades has been viewed by some as an effective tool in tempering some of the negative externalities arising from shareholder primacy. The period when CSR only referred to corporate philanthropic donations has long passed. Contemporary CSR is intimately intertwined with the ‘green’ movement, and the cross-sector expansion of CSR is growing increasingly apparent on the global stage. Academic scholarship has become saturated with CSR-focused research, a topic that spans several disciplines (including business, political science, economics, law, sociology, and environmental studies), and appears in various theories and approaches within those disciplines (such as institutionalism, law and economics, law and society, and organizational behaviour, to name a few). A parallel trend can be found in the rise of the socially responsible investing (SRI) movement, where holders of capital look beyond share value metrics and consider other variables such as ESG (environmental, social, and governance) factors in their investing decisions. The movement has made considerable inroads in the last decade at reorienting   4  investors toward long-term outlooks and greater sustainability.9 Nevertheless, while developments in the CSR and SRI movements may be viewed as worthwhile by some leaders seeking corporate reform, there are certain ideological and practical limitations that challenge any true reformation of the shareholder primacy model. Existing power imbalances and path dependence, entrenched ideologies, and the overwhelming pull of short-term market forces within our global capital system make transformative change in corporate behaviour particularly difficult.10  The main alternative legal structures to the corporation are charitable and non-profit organizations (NPOs).11 NPOs are not required to pay income tax (and in addition, charities are able to issue tax receipts), so they have certain restrictions. In Canada, charities must fall within four defined heads of charity,12 refrain from engaging in “political activities,”13 among other things, and NPOs are required to be exclusively for “social welfare, civic improvement, pleasure, recreation, or any other purpose except profit.”14 However, they are not prohibited from engaging in “incidental” business activities, which means that an NPO can only make profit if it is by accident. This rule means little to no growth in capital to reinvest into the organization. NPOs get the bulk of their money through corporate, governmental, and other types of donations,                                                  9 CSR and SRI are discussed in more detail in Chapter 2.  10 A discussion on entrenched ideological beliefs and path dependence is found in Section 2.2. 11 Charities are included in this category, as all charities are non-profits. Note that in Canada, the language is slightly different. Non-profit organizations exclude registered charities, and the proper terminology in capturing the entire tax-exempt public sector is “not-for-profit corporations.”  12 The four heads of charity are taken from the common law, specifically from Commissioners for Special Purposes of Income Tax v. Pemsel [1891] AC 531 (HL). 13 Income Tax Act (Canada), ss. 149.1(6.1) and 149.1(6.2). 14 Ibid. at para. 149(1)(l).   5  and have difficulty growing once their funding sources are tapped. Former American non-profit leader Dan Pallotta has argued that society’s “economic apartheid” of for-profit and non-profit sectors “undermines our ability to eradicate great problems and, ironically, puts charity at a severe disadvantage to the for-profit sector at every level.”15 He calls this unfair economic divide in corporate law a serious moral issue. Yet allowing NPOs more access to capital and free market liberties may be viewed by some as only perpetuating a neoliberal agenda. Critics argue that welcoming profit elements into NPOs wanting to “do good” will only leave them vulnerable of being corrupted.   Doubts aside, new legal innovations are challenging the notion that corporations are best governed in pursuit of a singular objective, and that NPOs’ profit-making abilities should be restricted. The next foreseeable stage in the CSR movement is in the reformation of existing laws and creation of new legal structures that not only enable, but require, CSR concepts to be embodied within corporate practices. CSR is getting a facelift in the private sector – mainstream companies are still catching onto CSR but the leaders at the forefront of the movement are transforming the concept into one of “social innovation” and the integration of business concepts with social activism. The growth of the “social enterprise” – a definition with no legal import in Anglo-American countries that refers to either a for-profit trying to “do good” or an enterprising non-profit – suggests a shift in the business landscape. Social enterprises are not fitting within the drawn lines of the for-profit / non-profit divide, and legislators are beginning to craft new corporate entities to meet growing demands from social entrepreneurs seeking infrastructure to house their social businesses.                                                   15 Dan Pallotta, Uncharitable: How Restraints on Non-Profits Undermines Our Potential (London: Tufts University Press, 2010) at 9.   6  A new generation of alternative corporations is emerging on the horizon. “Hybrid” corporations are corporate legal entities that blend for-profit and non-profit legal characteristics in their design requiring businesses to pursue dual economic and social mandates. Each hybrid contains features that may be particularly attractive for those currently situated in either the for-profit or non-profit sectors. Legal entities such as the benefit corporation and low profit limited liability company in the United States (US), and the community interest company in the United Kingdom (UK), are some alternative models for businesses that elect to have governing infrastructure support their social value output in addition to profit. Other countries, such as Australia, Belgium, Greece, Denmark, Japan, South Korea, and Israel, to name a few, are also in the early stages of developing hybrids. Some of these hybrids have been met with relative success in their home nations, others have not. Restrictions on dividends, obligations on directors to consider community interests, and community-purpose asset locks are only some of the unique governing features.16 Conceptual boundaries surrounding the social economy are being tested as hybrid corporations begin to grow in recognition. The emergence of corporate hybrids questions the foundational principles of corporate law, and whether mainstream legal institutions will need to adapt in order to accommodate greater demands for sustainability and social innovation. How are hybrids meaningfully different, if at all? The answers to those questions test age old arguments on the purpose of the firm and the nature of the non-profit.  In Canada, as more entrepreneurs express the desire to concurrently pursue economic and social mandates within their companies, legislators have struggled to keep up with the pace                                                  16 These hybrids are described in more detail in Chapter 4.   7  of innovation.17 Canadian legislators are contemplating the adoption of hybrid corporations into its laws, and indeed the process has already begun in a few provinces. The creation by the BC government of the community contribution company (C3 or CCC) which became available to the public in July 2013,18 and the community interest company in Nova Scotia which received Royal Assent December 2012 with enacted legislation still forthcoming,19 suggests a movement to parallel international trends. Several Canadian provinces are now actively considering the implementation of hybrids into their corporate statutes, and the 2014 public consultation by Industry Canada on certain provisions within the Canada Business Corporations Act (CBCA)20 has also included a request for comments on adopting a federal version of the BC C3 model.21 Corporate hybridity has received little scrutiny in academic scholarship to date, as it is a relatively new institutional phenomenon. This dissertation situates the new generation of hybrid legal structures within the broader context of Anglo-American neoclassical corporate legal theory, while pinpointing the theoretical tensions underlying the role of corporate law in socio-economic development. The underlying hypothesis is to test whether the creation of alternative corporate legal structures that account for the governance of social value will contribute to the advancement of the social economy to a greater extent than if such entities did not exist. Can, should, and if so, how do you transform the singular objective of shareholder wealth                                                  17 Josh Wingrove, “Marc and Craig Kielburger’s Do-gooding Social Enterprise” (19 March 2010) The Globe and Mail 2 (Paul Martin, Canada’s former Prime Minister, commented, “Government policy hasn’t caught up…I think Canada is ready for it. I think Canada is looking for it”). 18 Bill 23 – 2012, Finance Statutes Amendment Act, online: <>. 19 Nova Scotia Canada, Service Nova Scotia and Municipal Relations, “New Opportunities for Social Entrepreneurs’ (28 November 2012), online: <>.  20 Canada Business Corporations Act, RSC, 1985, c C-44 [CBCA]. 21 Industry Canada, “Consultation on the Canada Business Corporations Act,” online: <>. The deadline for comments was on 11 March 2014.   8  maximization in the corporate firm? What are the risks in inviting profit into the non-profit organization (an oxymoron in and of itself)? Why would an entrepreneur choose a hybrid form over existing alternatives? This dissertation aims to answer those questions and whether solutions can also be found through the improvement of existing corporate, non-profit, and/or tax laws.  There is a delicate interplay between corporate law and social policy, and it is evident that there are limitations in employing purely legal means to cause normative shifts in corporate culture. The emergence of hybrid corporations on the international stage suggests a unique sector of the social economy is beginning to form, but this assumption has not been tested. Canadian federal and provincial governments are responding to growing demands by establishing legal entities to govern businesses in the dual mission of profit and social value creation, with little assurance as to how these entities will fare. This dissertation examines newly implemented hybrids across nations and gauges the early successes and failures, while considering how the existence of hybrids is challenging traditional notions within corporate legal theory. The emergence of corporate hybrids highlights a global trend in corporate law toward a more stakeholder-based approach to management and increased expectations that corporations act as good global citizens. Canada is a unique country in which to study the emergence of corporate hybridity. This critical juncture in Canadian corporate history serves as a live experiment on the utility of hybrids. Corporate legal theory from a Canadian perspective is relatively limited, and this dissertation positions Canada within the international corporate law dialogue while assessing the overall effectiveness of emerging hybrids in contributing to the social economy. Implementation strategies are provided to future legislators, both domestic and international, who are interested in creating laws to support burgeoning social enterprises.   9   Part One of this dissertation lays the theoretical groundwork and justifications behind for the for-profit corporation and the non-profit organization, significant issues arising from historical and scholarly contexts, counter-hegemonic discourses in light of neoclassical corporate legal theory, and how tensions have signalled the rise in Anglo-American hybrid legal forms. Chapter 1 begins by identifying the tensions within the for-profit and non-profit arenas leading to the rise of social enterprises and early development of hybrids. The problem at hand is identified – transforming the singular objective of shareholder wealth maximization within corporate firms – and situated it within the context of existing literature. What was viewed as the original purpose of the corporation? How has the discourse evolved in the last several decades? The efficiency of shareholder primacy is questioned in light of the financial calamities that have plagued the first decade of the 21st century (particularly the corporate and accounting scandals of 2001-2002 and the global financial crisis), providing a timely outlook on how the model encourages corporate behaviour that perpetuates the likelihood of future crises. The chapter then modernizes the global convergence debate that dominated academic circles in the 1990s and posits that only partial convergence has occurred and it is unlikely there will ever be complete convergence to shareholder primacy. The findings in this chapter suggest that corporate legal theory is not stagnant but evolving alongside the evolution of scholarly thinking in reaction to real life events, and that it may be worthwhile to pursue both macro and micro reform efforts in corporate law to illicit social change.  Chapter 2 highlights debates that have spanned the decades on shareholder primacy in relation to stakeholder interests and social value, while addressing critiques and alternative approaches, particularly stakeholder theory and CSR, including the codification of CSR in the UK’s ‘enlightened shareholder value’ and the SRI movement, progressive corporate law, and   10  team production theory. Some formidable barriers facing reformation of the shareholder primacy model are addressed which, regardless of the validity of one’s theoretical arguments, perpetuate the perceived economic viability and continued domination of this mainstream corporate model. These factors include entrenched ideological beliefs that have permeated the psyche of corporate governance practices in global capital markets, and path dependence. This then poses the interesting follow-up question, which is whether alternative corporate legal structures may provide a pragmatic parallel track to reform efforts of the shareholder primacy model of governance.    The NPO is invited into the conversation in Chapter 3. While scholarship on the for-profit corporation has been vast and at times unwieldy, economic scholarship on the non-profit arena has tended to be more constrained and focused. Neoclassical economists have viewed NPOs as addressing excess demands that government cannot provide. The nondistribution constraint has been viewed as a point of comfort for consumers. These theoretical analyses are layered with practical realities and challenges facing NPOs. The inability of NPOs to use the engine of the market to effectively disseminate their social goods and services has put those organizations at a severe disadvantage to the for-profit sector. The notable disadvantage has precipitated a significant increase of social enterprises arising from the non-profit sector. Countervailing pressures in the non-profit sector open the door to possibilities with alternative hybrid legal structures, but the risks that hybrids will divert scarce resources away from the sector, and/or serve to perpetuate a neoliberal agenda are significant issues to some NPO advocates and should be kept in mind by proponents of the hybrid form.  Part One concludes by advancing in Chapter 4 some international legislative innovations that have been offered to assist in solving the problems besetting the for-profit / non-  11  profit divide, particularly the global development of hybrid corporations. The legal features of the UK community interest company, Canadian community contribution company, American low-profit limited liability company, B Corporation (privately regulated), and benefit corporation are addressed, as well as their relative success or failure in their home countries and projections as to why.  In Part Two, the focus shifts to Canada as a real time experiment of hybrid legislation. In particular, what are the essential factors that should be considered when determining whether to implement particular hybrid models within a jurisdiction? Early lessons are gleaned for both a Canadian and international audience. Canada’s corporate legal development serves as a country-specific test against the hypothesis of this dissertation. Any nation considering the adoption of hybrid corporations into their own laws must conduct a thorough analysis of their existing corporate alternatives and how they function in corporate practice, so as to better project how the emergence of new alternative corporate models will affect the existing corporate landscape. Canada is a particularly useful example as two of its provinces have adopted a UK hybrid model, and there are other provinces that are contemplating the adoption of an American hybrid model. In Chapter 5, Canada’s current model of corporate governance is identified using qualitative empirical data, particularly where the model differentiates from the descriptions in Chapter 1, if at all, to allow subsequent chapters to apply these findings to hybrid models currently being explored within the country. The analysis reveals an interesting counterpoint to assumptions that Canadian laws also adhere to a shareholder primacy model. These legal differences should be taken into account when considering what kind of hybrid ‘alternative’ is offered relative to the mainstream corporate model.     Chapter 6 offers a pragmatic look at the legal ramifications of implementing the   12  American benefit corporation in Canada given the information provided in Chapter 5 on Canada’s current corporate model. Leaders in the hybrid movement must be informed on the status of existing corporate governance standards and norms, so that incoming hybrids can be tailored specifically to a jurisdiction’s social and legal needs. The features of the benefit corporation are markedly similar to that of Canada’s existing corporate laws, and therefore its implementation in Canada as an ‘alternative’ would only solidify misconceptions about Canada’s corporate laws and further reinforce the idea that the purpose of the corporation is solely for profit-making purposes. If hybrids are to serve as a parallel track to reform, it is important that they do not thwarting ongoing reform efforts behind the mainstream corporate model in the meantime. Hybrid alternatives must offer legal features that reinforce dual mandates, beyond what is already permissible under Canadian laws. The latter half of the chapter outlines the challenges in fostering the development of existing and emerging hybrids, and argues that there is still considerable room for the creation of new innovative hybrids to enter the Canadian corporate landscape.  Finally, the puzzle pieces from earlier chapters are fitted together and Chapter 7 summarizes the collected evidence to conclude as to whether the creation of hybrids can contribute to the advancement of the social economy beyond the current status quo. An overall framework is provided for legislators and social innovators to assess whether a jurisdiction is well suited for the placement of new hybrids, and how to strategically implement such hybrids going forward. This dissertation concludes is that hybrid legal structures governing social value output may advance the social economy within a certain set of parameters, but there are several notable risks and legislators should proceed with caution. A nation must have a strong demand for an additional alternative corporate model from social entrepreneurs, which is justified due to   13  the state of a nation’s corporate laws and not from incorrect assumptions about those laws. In addition to a legal justification there must be an economic justification, and considerable governmental support in administering, regulating, promoting, and educating any new hybrid alternative that is made available to the public in order to ensure long-term success. Without the necessary support, every hybrid legal structure has a high chance of becoming dormant legislation that is ineffective in offering solutions to the pressing problems of our time, or worse, impede on other reform efforts in corporate law. On the flip side, if a hybrid form becomes widely utilized, policymakers need to consider whether such hybrids are at risk of funnelling resources away from or shrinking the non-profit sector, and if so, whether and how to prevent or circumvent such risks. This dissertation identifies the early risks in blurring the lines between the for-profit and non-profit sectors, and carries hybrid corporate legal scholarship into the mix of for-profit and non-profit analysis on both a theoretical and practical level. If hybrid organizations do indeed carry the potential of advancing the social economy beyond existing laws, then it is critical to get it right and capitalize on that potential, while also continuing along existing pathways to reforming the mainstream corporate model. As we move ahead in the 21st century seeking solutions to combat, or at least delay, staggering social inequalities and impending environmental catastrophes, the efforts on the part of legislators to craft new corporate alternatives offer interesting new ways of utilizing corporations for the greater good, while also questioning the mainstream corporate form and its purpose, potential, and role in society for the future.      14  PART ONE: Corporate Legal Theory and the Rise of Legally ‘Good’ Corporations CHAPTER 1: Anglo-American Corporate Legal Theory in Context Corporate institutions have become one of the most powerful legal structures in Anglo-American society.22 Good or bad, it is undeniable that corporations have permeated our everyday lives. Before one can embark on any discussion regarding “hybrid” alternatives, it is important to understand some of the historical justifications behind the corporation that have led to its present day impact. What is the purpose of the corporation? The answer to that question has been debated for decades by corporate legal scholars, economists, and others, and is critical in understanding how hybrids are expected to be situated within the existing corporate landscape. This chapter begins by highlighting some of the dominant theoretical foundations of the modern corporation, starting with the work of economist Ronald Coase, and how others – most notably Michael Jensen, William H. Meckling, Eugene Fama, Frank Easterbook, and Daniel Fischel – have built upon Coase’s work to further develop a neoclassical economic view of the firm. Next, some of the dominant corporate legal literature that developed around the same time as Coase’s work is considered, specifically Adolf Berle and Gardiner Means’ well-known analysis of the “separation of ownership and control” in corporate governance. The shareholder primacy model is regarded by some scholars as the dominant model that is here to stay, and one                                                  22 Kellye Testy provides a commanding description of this phenomenon, stating:  “Start with a pervasive distrust of regulatory solutions to economic problems, together with a concomitant faith in the righteousness of private ordering. Add to that the privileged status of financial capital in corporate governance, which is reinforced by an obsessive focus by corporate managers and investment communities on short-term share price. All of that, combined with exponential growth in the transfer of technology and other products across national borders, have paved the way for corporations to rival the state, and certainly the church, in institutional power and influence.” Kellye Testy, “Linking Progressive Corporate Law and Progressive Social Movements” (2002) 76 Tulane L Rev 1227 at 1228.   15  that all other models will eventually converge into.23 But has there, in fact, been global convergence into the mainstream model?  The answer to that question is considered after outlining the neoclassical justifications for the shareholder primacy model and prevailing legal and economic approaches to corporate law. In the face of financial calamities that have occurred in the 21st century, there have been changes in dominant perspectives which have started to lay the groundwork for alternative corporate models. The evidence suggests that full-fledged convergence will not occur, as jurisdiction-specific nuances prevent full-scale adoption despite the influence of the global markets. There is thus some room for varying types of corporate models to enter the corporate legal landscape, although significant barriers predict that the impact of these models will likely be smaller in scale.    1.1 Economic Efficiency and Nexus of Contracts In 1937, Ronald Coase offered an economic explanation as to why individuals choose to form partnerships, companies, and other business entities rather than trading bilaterally through contracts on a market. The traditional economic theory of the time implied that, because the market is efficient and “works itself,” it should always be cheaper to contract out than to hire.24 Coase observed how outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, however, these market transactions are eliminated, and in place is the “entrepreneur–coordinator” who directs production, creating “islands of conscious power in this ocean of unconscious co-                                                 23 Such as the viewpoint of Hansmann & Kraakman, infra note 102. 24 Coase made this point citing the work of Sir Arthur Salter in DH Robertson, “Control of Industry” and Arnold Plant, “Trends in Business Administration” (1932) Economica 85.    16  operation like lumps of butter coagulating in a pail of buttermilk.”25 According to Coase, the main reason why it is profitable to establish a firm is because there is a cost of using the price mechanism. The most obvious cost is in discovering what the relevant prices are, but there are also costs of negotiating and concluding a separate contract for each exchange transaction taking place on the market, and other costs including “search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs.” 26 Contracts are not eliminated when there is a firm, but they are greatly reduced, suggesting that companies will arise when they can arrange to produce what they need internally and somehow avoid these costs. Thus, Coase’s transaction costs theory contends that corporations exist to economize on the cost of coordinating economic activity.  There is a natural limit to what contractual relationships can be produced internally, however. Coase found that “decreasing returns to the entrepreneur function,” including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation are countervailing costs to the use of the corporate firm. Coase argued that the size of a firm (as measured by how many contractual relations are “internal” to the firm and how many are “external”) is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually occur, preventing the firm from growing indefinitely.27 Coase’s analysis demonstrates how, when transaction costs are                                                  25 Ronald H Coase, “The Nature of the Firm” (1937) 4 Economica 386, quoting DH Robertson at 388. 26 Ibid. at 390-391. 27 Other things being equal, therefore, a firm will tend to be larger: (1) the less the costs of organizing and the slower these costs rise with an increase in the transactions organized; (2) the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized; and (3) the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size. Ibid. at 396-397.    17  positive, institutions matter and share the resultant market structure, conduct, and hence performance. Recognition of this gives some credence to the explanation as to why seemingly inefficient rights, rules, and institutions exist and are perpetuated. New institutional economics has incorporated this aspect of transaction costs theory into its formal analysis, arguing that since there are costs to establishing and enforcing property rights, individuals or groups will devote resources to securing the establishment of, or a chance in, property rights only when they perceive that the benefits from such a change will outweigh the costs.28  According to Coase, legal rules are only justified by reference to a cost-benefit analysis. If we lived in a world without transaction costs, people would bargain with one another to produce the most efficient distribution of resources, regardless of the initial allocation. However, many welfare-maximizing reallocations are often forgone because of the transaction costs involved in bargaining.29 In cases like these with potentially high transaction costs, Coase believed the law should produce an outcome similar to what would result if the transaction costs were eliminated. Coined as the “Coase Theorem” by George Stigler,30 the theorem guarantees not only the attainment of the efficient outcome but also that the efficient outcome will be reached in the most efficient fashion. The theorem is “frequently misunderstood” since the world assumed by the theorem bears little correspondence to the real world.31 But it is a useful fiction that shows how, under certain conditions, the form of legal rules does not affect the allocation of                                                  28 See e.g., Nicholas Mercuro & Steven Medema, Economics and the Law: From Posner to Post-Modernism and Beyond, 2nd Ed. (Princeton: Princeton University Press, 2004) at 241-283. More on NIE is discussed in Chapter 7. 29 Ronald H Coase, “The Problem of Social Cost” (1960) 3 J. Law & Econ 1 at 7. 30 George Stigler, The Theory of Price, 3rd ed (1966) at 113 (“The Coase theorem thus asserts that under perfect competition private and social costs will be equal.”). 31 Mercuro & Medema, supra note 28 at 113.    18  resources. The Coase Theorem and transaction costs theory supports the argument that efficiency should be the criterion for legal rule-making. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer. Coase notes that “all solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm.”32 He suggests that, beyond being reciprocal in nature, externalities are also amenable to efficient resolution without tax or regulatory measures being imposed – at least if markets operate without frictions. This requires that the conditions be met. First, rights over the resources in question must be fully specified.33 That is, some party must have legal control over those resources; if there are no rights over said resources or those rights are incompletely defined or unassigned, market-oriented solutions are all but precluded. Second, legal rights must be alienable: if rights cannot be exchanged, the processes are rendered inoperative.34 The final assumption is that transaction costs, including the costs of acquiring information, are zero. When these conditions are met – that is, when the exchange or market process is frictionless – all that is necessary is that the government decide liability one way or the other, in effect granting one party the right to act or the other party the right to be free from the action of the first party. Once these rights are defined and assigned, the parties are then free to trade the rights, and will do so if it is in their self-interest – ultimately, to an efficient solution.  Coase argued that the law and regulation are not as important or effective at helping                                                  32 Coase, supra note 25 at 18. 33 Ibid. at 19. 34 Ibid.   19  people as lawyers and government planners believe.35 Coase wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analyzing the costs of action.36 Thus, the “Coase lesson” as described by Nicholas Mercuro and Steven G. Medema, indicates that courts should structure rights in a way that minimizes the amount of resources used up so that society can use the “saved” resources for other, more highly valued activities.37 It follows that if efficiency is considered an important value in determining the law, then in general, courts should attempt to assign rights in such a way as to minimize the sum of all costs associated with the externality, including transaction costs.  The economic logic that underpins the Coase lesson is that a wide range of benefits and costs can, and usually do, attend alternative assignments of rights. That is, no matter what one’s view of the normative import of efficiency, law does have important efficiency implications, and these include the costs associated with transacting over rights. The logic of this reasoning is inherent in Coase’s approach where he states: The problem which we face in dealing with actions which have harmful effects is not simply one of restraining those responsible for them. What has to be decided is whether the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action which produces the harm. In a world in which there are costs of rearranging the rights established by the legal system, the courts…are in effect, making a decision on the economic problem and determining how resources are to be employed.38  Coase also argued that “the courts are conscious of it” and that judges “often make, although not always in a very explicit fashion, a comparison between what would be gained and what would                                                  35 Ibid. at 17-18. 36 Ibid. at 23. 37 Mercuro & Medema, supra note 28 at 113. 38 Coase, supra note 25 at 27-28.   20  be lost by preventing actions which have harmful effects.”39  The influence of Coase’s work has been profound – his two articles, “The Nature of the Firm” and “The Problem of Social Cost,” are among some of the most cited articles in the history of economics and law.40 Scholars of the “Chicago school” of law and economics have frequently used an Anglo-American view of neoclassical economic theory and efficiency analysis to explain and understand the development of law. Several notable scholars that built upon Coase’s work and applied it in a corporate legal context include Michael Jensen and William H. Meckling, who went on to formulate the conception that the corporation as a “nexus of contracts,” where shareholders are not the owners of the firm, but rather a party that has strong contractual claims against the firm.41 Other economists followed suit. In their 1996 work The Economic Structure of Corporate Law, Frank Easterbrook and Daniel Fischel also contended that in economic terms, the corporation is simply a “‘nexus of contracts’ . . . a financing device . . . [that] is not otherwise distinctive.”42 They described how the rules and practices of corporate law mimicked the contractual provisions that parties would reach if they bargained about every contingency at zero cost and flawlessly enforced their agreements.43 Since bargaining and enforcement are costly, corporate law provides the rules and an enforcement mechanism that governs relations among those who commit their capital to such ventures. Corporate law is thus considered to be a branch                                                  39 Ibid. at 28. 40 William M Landes & Sonia Lahr-Pastor, “Measuring Coase’s Influence” 54 (2011) J of L & Econ S383.  41 Michael C Jensen & William H Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (1976) 3 J Fin Econ 305-312. 42 Ibid. at 12. 43 Frank H Easterbrook & Daniel R Fischel, The Economic Structure of Corporate Law (Cambridge: Harvard University Press, 1996).   21  of contract law; it is an economic structure – “contract law on a large scale” – and the relations of participants in a firm substitute for transactions in a market.44 Echoing Coase, one of the defining characteristics of the Chicago school of thought is its contention that legal rules and outcomes can be assessed on the basis of their efficiencies. Richard Posner, recognized as one of the foremost leading proponents45 of the Chicago school, was one of the first to advance the efficiency hypothesis in detail.46 While a host of various measures surround the concept of efficiency, Posner has pointed out that the common operating definition in economics is “nine times of out of ten” in reference to Kaldor-Hicks efficiency.47 Under Kaldor-Hicks efficiency, an outcome is considered more efficient if the monetary value of society’s resources is maximized. If the marginal willingness to pay by those who benefit from an action is equal to the marginal willingness to accept payment by those harmed, Kaldor-Hicks efficiency contends that all parties end up no worse off than before.48 In this regard, a legal change can be said to be Kaldor-Hicks efficient “if the gains to the winners exceed the losses to the losers or, alternatively stated, if the wealth of society (as measured by willingness to pay) is increased.”49                                                   44 Ibid. at 10. 45 See e.g., Mercuro & Medema, supra note 28 at 51 (stating, “The work of [Chicago law and economics] scholars, of whom Posner – as professor, scholar, and judge – is perhaps the foremost exponent, form the core of the Chicago approach”). 46 Other founding scholars of the Chicago school have been identified by many as Coase, Guido Calabresi, Henry Manne, and Gary Becker. See e.g. ibid. at 59-83. 47 Richard Posner, Economic Analysis of Law, 6th ed (New York: Aspen Publishers, Inc., 2007) at 15.  48 But this of course would only be the case if those harmed were paid directly or indirectly by those benefitting or their proxies. See also Mercuro & Medema, supra note 28 at 59-60 (providing examples of Kaldor-Hicks efficiency). 49 Easterbrook & Fischel, supra note 43 at 59.   22  Easterbrook and Fischel’s contract theme repeatedly emphasizes the underlying economic logic of corporate legal rules. Limited liability provides a low-cost prerequisite for the separation of risk-bearing from control.50 Voting serves as the mechanism for disciplining management in the market for control.51 The fiduciary principle manages potentially high monitoring costs,52 while the business judgment rule limits the costs of liability as a governance mechanism.53 Corporate control transactions (going private or hostile takeovers) “move assets to higher valued uses.”54 State competition for the legal domiciles of corporations leads toward optimal legal arrangements.55 Easterbrook and Fischel state their position straightforwardly: “[C]orporate law should contain the terms people would have negotiated, were the costs of negotiating at arm’s length for every contingency sufficiently low…[and] corporate law almost always conforms to this model.”56  Easterbrook and Fischel point out that corporate law determines the internal governance arrangements among members of a firm, and they argue that few (if any) third party effects or other problems undermine the utility of the law.57 They note that the corporation-as-contract view fails to explain the ease with which management can unilaterally change the contract.58 The                                                  50 Ibid. at 41. 51 Ibid. at 67-68. 52 Ibid. at 92. 53 Ibid. at 94. 54 Ibid. at 113. 55 Ibid. at 215. 56 Ibid. at 15. 57 Ibid. at 17. 58 Ibid. at 33-34.   23  law deals poorly with end-period problems that arise in areas such as limited liability59 and tender offers.60 Voting’s collective action problems make it possible for management to ratify wealth-reducing activities.61 They recognized, however, that their theme of legal efficiency may conflict with their criticism of takeover law: “Current law on takeovers reflects infatuation with gain sharing at the expense of wealth…It reflects a devotion to intrinsic value that has as much empirical support as the proposition that hurricanes are caused by witches.”62 They suggest that state antitakeover statutes prove an exception to the normal efficiency of state competition in law because legislators tend to behave opportunistically with respect to takeovers.63 Thus, they admit some exceptions to the efficiency of the corporate legal structure.  It is important at this juncture to make a few comments as to the Coase Theorem, its application, and the legacy of the Coase’s work. As noted earlier, the Coase Theorem is frequently misunderstood as it bears little resemblance to real world issues. While several economists such as those named in this section went on to flesh out Coase’s research, the theorem also became “transformed into an icon of the political right” and was “used to justify a hands-off approach to big business on the part of politicians, regulatory agencies, and judges, leaving pollution and other economic problems to the corrective powers of the free market.”  64 This was not as Coase intended – on the contrary, in fact. After receiving the Nobel Prize in                                                  59 Ibid. at 51. 60 Ibid. at 169. 61 Ibid. at 81. 62 Ibid. at 209. 63 Ibid. at 219-222. 64 John Cassidy, “Ronald Coase and the Misuse of Economics,” online: The New Yorker <>.   24  1991, Coase reflected on how his theorem was meant to serve “as a stepping stone on the way to an analysis of the economy with positive transaction costs.”65 The world in which Coase imagined where affected parties can come together, with all relevant information at hand, and reach a voluntary agreement at zero cost, is – as described by Coase – “a very unrealistic assumption”66 and “quite unimaginable.”67 The misapplication of Coase’s Theorem as a tool to align with conservative laissez-faire market values while ignoring negative externalities, has been described by pundits as both “ironic” and “tragic,”68 as well as “vulgar,”69 among other things.  To Coase, it was important to acknowledge that the efficiency of the economic system “depends to a very considerable extent on how…organisations conduct their affairs, particularly, of course, the modern corporation. As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory.”70 It is critical, therefore, that before one dismisses or embraces the Coase Theorem based on one’s left or right wing tendencies, the theorem is regarded in the context that Coase intended – which is as a mental exercise existing within a set of parameters inconceivable in real life. In that vein, one should                                                  65 Ronald Coase, “The Institutional Structure of Production,” Nobel Prize Lecture (9 December 1991), online: Nobel Prize <> [Coase, “Nobel”]. 66 Coase, supra note 29 at 15. 67 EconTalk Episode with Ronald Coase, “Coase on Externalities, the Firm, and the State of Economics,” 12 May 2012, online: Library of Economics and Liberty <>, stating: “I never liked the Coase Theorem…I don’t like it because it's a proposition about a system in which there were no transaction costs. It's a system which couldn't exist. And therefore it’s quite unimaginable.” 68 Cassidy, supra note 64. 69 Timothy B Lee, “The Coase Theorem is Widely Cited in Economics. Ronald Coase Hated It.” (4 September 2013) The Washington Post, online: <>.  70 Coase, “Nobel,” supra note 65.   25  also consider Coase’s advice for future research: “let us study the world of positive transaction costs.”71  1.2 Shareholder Primacy and the Separation of Ownership and Control At around the same time as when Coase wrote “The Nature of the Firm” (which, interestingly, had little to no influence until 30 to 40 years after it was published72), the theoretical framework on the governing structure within the corporation was also taking shape. The 1932 book by Berle and Gardiner Means, The Modern Corporation and Private Property, was the first to identify a new major development in corporate law – the concept of a “separation of ownership and control” between shareholders and management.73 Berle and Means described how public corporations were beginning to be comprised of two factions: controlling managers, considered the new “princes” of the social institution, and passive shareholders, the only residual claimants to the company’s net assets.74 This book is noted by many scholars as perhaps the single most influential book in corporate legal history. In the ensuing decades, there was a growth of theoretical principles and usage of terms that reinforced the concept of the Berle-Means corporation. Berle, in particular, has been named as the forefather of the shareholder primacy model of the corporation, but this has not been without some slight disagreement among corporate scholars.75 In a later article, Berle outlined how management’s authority was to be                                                  71 Ibid. 72 Ronald Coase, “The Nature of the Firm: Influence” in Oliver Williamson and Sidney Vinter, eds, The Nature of the Firm: Origins, Evolution, and Development (Oxford: Oxford University Press, 1993) at 61.  73 Berle & Means, supra note 7. 74 Ibid at 116. 75 See William Bratton & Michael Wachter, “Shareholder Primacy’s Corporatist Origins: Adolf Berle and ‘The Modern Corporation’” (2008) 34 J Corp L 99.   26  exercised for the benefit of the corporation’s shareholders. According to Berle, “all powers granted to a corporation or to the management of a corporation, or to any group within the corporation . . . [are] at all times exercisable only for the ratable benefit of all the shareholders as their interest appears.”76 Interestingly enough, in 1962 Berle conceded that he was wrong in limiting corporate actions to those solely for the benefit of shareholders, as corporations at the time seemed freely engaging in acts of philanthropy with little pushback from shareholders.77  While Berle and Means’ division between ownership and control connotes a separation of interests that almost compels government oversight, the corporation-as-contract view sees a separation of functions that private contracts fully coordinate. To those who question market efficiency, Easterbrook and Fischel argue that no other social institution appears superior78 and that “[t]he long run will arrive eventually.”79 Easterbrook and Fischel saw a separation as between “risk-bearing” and control80 as opposed to Berle and Means’ separation of ownership and control. Jensen and Meckling note that the separation of ownership and control and the managerial revolution remained subjects of interests and occasionally some controversy, but much of the steam left the debate with the post-WWII expansion of the Western economies, the sustained increase in international trade, and the unchecked growth of the multinational                                                  76 Berle, “Corporate Powers,” supra note 239 at 1049. 77 Adolf Berle, “Modern Functions of the Corporate System,” (1962) 62 Columbia L Rev 433.  78 Easterbrook & Fischel, supra note 43 at 19. 79 Ibid. at 21. 80 Ibid. at 11.   27  corporations.81 Meanwhile, neoclassical economics “has attempted to develop a theory of resource allocation based on market exchange, and neglected the economic analysis of the productive sphere of the economy.”82 They reflected on how a number of later schools of economic thought broke further from the economic ideal of neoclassical economics than the “market imperfections” approach, and attempted explanations for economic governance based on a new understanding of economic activity and resource allocation. Jensen and Meckling addressed how among these new economic theories of the firm, agency theory became the dominant force in the theoretical understanding of corporate governance in the last decades of the 20th century.83 Jensen and Meckling argue agency theory rests upon this contractual view of the firm. The essence of the agency problem is the separation of management and finance. Managers raise funds from investors to put them to productive use or to cash out their holdings in the firm. Financiers need the managers’ specialized human capital to generate returns on their funds. In principle the financiers and managers sign a contract that specifies what the managers do with the funds, and how the returns are divided between them and the financiers. The trouble is future contingencies are hard to foresee and complete contracts are infeasible. The managers and financiers have to allocate residual control rights – the rights to make decisions not foreseen in the contract. Managers end up with substantial residual control rights, and therefore discretion over how to allocate investors funds. From this point of view much of the subject of corporate governance concerns the constraints that managers put upon themselves, or that investors put on                                                  81 Jensen & Meckling, supra note 41. 82 Mercuro & Medema, supra note 28. 83 Jensen & Meckling, supra note 41.   28  managers, to reduce misallocation and thus to induce investors to provide more funds. Jensen and Meckling pose the following question: “Why, given the existence of positive costs of agency relationship, do we find the usual corporate form of organisation with widely diffuse ownership so widely prevalent?”84 The agency view suggests that shareholders are the ‘principals’ in whose interest the corporation should be run even though they rely on others for the actual running of the corporation. Eugene Fama and Jensen propose the separation of decision making and risk-bearing functions observed in the large corporation occurs in other organizations such as large professional partnerships, financial mutual, and non-profits.85  It is claimed shareholders have the right to residual claims because they are the residual risk bearers. As equity investors, the suggestion is that shareholders are the only economic actors who make an investment in the corporation without any contractual guarantee of a specific return. As ‘residual claimants,’ shareholders bear the risk of the corporation making a profit or loss, and have an interest in the allocation of corporate resources to make the largest residual possible. Since other stakeholders in the corporation will receive the returns for which they have contracted, the maximization of shareholder value results in superior economic performance, not only to the particular corporation, but for the economy as a whole. Fama and Jensen argued that shareholders are better equipped to bear risk than managers or workers, because they are not tied to the firms in which they hold shares.86 Shareholders can diversify their investment portfolios to minimize risk. This separation of management and residual risk bearing in the corporation allows optimal risk allocation in the corporate economy.                                                   84 Ibid. at 330. 85 Eugene Fama & Michael Jensen, “Separation of Ownership and Control” (1983) 26 J L Econ. 301 at 309. 86 Ibid.   29  An alternative theoretical approach that developed subsequent to transaction costs theory and agency theory is property rights theory, pioneered by Sanford Grossman and Oliver Hart in 1986, which adds an important dimension to analyses on firm structure.87 While Adolf Berle and others88 had noted the importance of property rights within the firm well before Grossman and Hart’s work, the subject of property rights “received renewed attention following [Grossman and Hart’s] assessment that property rights over assets can be used to define boundaries of firms.”89 Property rights theory “has common intellectual antecedents with transaction costs theory and agency theory,” but it is conceptually different in its focus on the incentives of owners of assets to invest or exert effort.90 As described by Ilya Segal and Michael D. Whinston,  Property rights over an asset can be defined as a bundle of decision rights involving the asset (also called entitlements in the legal literature), which provide rights to take certain actions (“rights of access”) and to prevent others from taking certain actions (“rights of exclusion”), including the right to take the profit generated by use of the asset and to prevent others from doing so, often called “profit rights” or “cash flow rights” in the literature.91  Property rights thus confer the residual rights of control to the owner of an asset. The owner is entitled to the use and benefits of the asset except insofar as he or she has contractually agreed to limits on those rights. Since it is impossible to contract specifically on certain future decisions                                                  87 Sanford J. Grossman and Oliver D. Hart, “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration” (1986) 94(4) J of Pol Econ 691; see also Oliver Hart & John Moore, “Property Rights and the Nature of the Firm” (1999) 98(6) J of Pol Econ 1119; Oliver Hart, Firms, Contracts, and Financial Structure (Oxford University Press, 1995). 88 See e.g. Adolf Berle, Power Without Property: A New Development in American Political Economy (1959). 89 Ilya Segal & Michael D. Whinston, “Property Rights”  in R. Gibbons and J. Roberts, eds., Handbook of Organizational Economics (Princeton University Press, 2012). 90 Jongwook Kim & Joseph T. Mahoney, “Property Rights Theory, Transaction Costs Theory, and Agency Theory: An Organizational Economics Approach to Strategic Management” (2005) 26 Manage Decis Econ 223 at 236.   91 Segal & Whinston, supra note 89.   30  and renegotiations will inevitably take place, parties have insufficient incentives and contracts should be regarded are incomplete units of analysis in studying the firm. In this way, property rights matter very much, because they determine future bargaining positions.92 The theory offers a “complementary organizational economics approach that informs analysis of both institutions and governance within the discipline of strategic management” which emphasizes the concept of residual control rights.93  The key notion behind property rights theory is that it derives the optimal allocation of ownership rights to assets in the economy to maximize social welfare.94  Hart and John Moore examined a model of optimal property rights based on the assumption of positive bargaining externalities, 95 and scholars have noted how “the allocation of property rights can matter even in the absence of noncontractible actions/investments, when these rights affect the efficiency of agreements reached by the parties when their bargaining falls short of the perfectly efficient Coasian ideal.”96 The rich analysis that has developed from property rights theory, using sophisticated mathematical data, has influenced a broadened thinking of firm incentives and the                                                  92  Patrick W Schmitz, “Bargaining Position, Bargaining Power, and the Property Rights Approach” (2013) 119(1) Economics Letters 28.  93 Kim & Mahoney, supra note 90 at 237.  94 Nevertheless, in practice, complications often arise within the concept of property rights within a firm. Segal & Whinston note:  First, these rights of ownership are not always bundled together. For example, some stockholders of a firm may own a share of its profits, but may not have the right to vote on the use of the firm’s assets. Similarly, an individual may possess the right to use an asset, such as a community garden or lake, but may not have the right to exclude others from doing so. Lastly, in some cases an owner may not possess the right to transfer his ownership rights to others, as with the prohibition against slavery. In addition, property rights are in practice often held collectively. For example, no single shareholder in a firm may be able to use the firm’s assets as he sees fit. Yet, a majority of the shareholders, should they reach an agreement, can do so. Segal & Whinston, supra note 90 at ftn. 2.  95 Hart & Moore, supra note 87. 96 Segal & Whinston, supra note 89.   31  allocation of risks and resources within the business and economics fields.97  The common thread woven through transaction cost theory, agency theory, and property rights theory is dissatisfaction with neoclassical economics’ treatment of firm behaviour.  “Unitization” refers to private contractual arrangements to reduce economic losses associated with common pool extraction. Kim and Mahoney note the main differing features of the three theories: Agency theory is not concerned with the process of how a unitization agreement actually comes about. That is, agency theory focuses on the principal– agent relationship once a team production setting, with principal–agent relationship, is put in place. But why unitization (despite its potential for aggregate economic gain) is formed, or even more important, why it will not be formed, falls outside the analytical framework of agency theory. Second, both agency and transaction cost concepts of market frictions can be largely subsumed under the property rights concept of (negative) externalities.98  Kim and Mahoney note that “this dissatisfaction [by property rights theorists] has been channeled productively in the development of organizational economics theory within strategic management to explain and provide predictions for important business phenomena.”99 In this way, property rights theory attempts a “stylized modeling of ownership and incentive structures,” and offers important insights beyond transaction costs theory and agency theory toward the efficient formation of the governing structure within the firm, 100 and potential alternatives to the                                                  97 This dissertation is limited in its analysis of property rights theory given its economic depth and reliance on other economic theories that are beyond the scope of this dissertation, however, readers are encouraged to read Grossman and Hart’s seminal work and subsequent research, cited at supra note 87.  98 Kim & Mahoney, supra note 90 at 236.  99 Ibid.  100 Note that both transaction costs theory and property rights theory offer explanations of what Bengt Holmstrom and John Roberts call the “boundaries of the firm” that offer unsatisfactory accounts of a large variety of observed practices. Bengt Holmstrom & John Roberts, “The Boundaries of the Firm Revisited” (1989) 12(4) J Econ Perspectives 73. Holmstrom and Roberts recognize that firms are “complex mechanisms” for coordinating incentives and motivating activities, thus their argument lies in the fact that approaches which “focus on one incentive problem that is solved by the use of a single instrument give much too limited a view of the nature of the firm, and one that is potentially misleading.” Ibid. at 75.   32  firm.   Law and economics scholars have often used normative analysis to explain managerial conduct that does not easily operate within the expected efficiencies of the shareholder primacy model, suggesting that managers “engage in stewardship of the corporation influenced by norms that bridge the gap between efficiency-enhancing activity and duties of care and loyalty.”101 Henry Hansmann and Reinier Kraakman agreed that agency costs associated with divergent objectives between managers and shareholders are comparatively less, stating that the shareholder primacy model has “stronger incentives to reorganize along lines that are managerially coherent.”102 Their arguments cumulated into the position they held in 2001, where they argued that the basic law of corporate governance had already achieved a high degree of uniformity to the shareholder primacy model103 and “continued convergence towards [this] single, standard model is likely.”104 Key normative principles in this consensus include:  (1) ultimate control over the corporation should rest with the shareholder class; (2) managers should be charged with the obligation to manage the corporation in the interests of its shareholders;                                                                                                                                                               101 Janis Sarra, “Oversight, Hindsight, and Foresight: Canadian Corporate Governance through the Lens of Global Capital Markets” in Janis Sarra, ed, Corporate Governance in Global Capital Markets (Vancouver: UBC Press, 2003) at 42. See also Eric Posner, “Law, Economics and Inefficient Norms” (1996) 144 U Pa L Rev. 1697 at 1699; and Melvin Eisenberg, “Corporate Law and Social Norms” (1999) Columbia L Rev 1253 at 1256. 102 Henry Hansmann & Reinier Kraakman, “The End of History for Corporate Law” (2001) 89 Geo LJ 439 at 14. 103 In general, there seems to be little contention in legal scholarship regarding Hansmann and Kraakman’s definition of shareholder primacy. See e.g. ibid; Stephen Bainbridge, “Director Primacy: The Means and Ends of Corporate Governance” (2003) 97 Nw U L Rev. 547, 573 (describing two principles of shareholder primacy being the shareholder wealth maximization norm and the principle of ultimate shareholder control); Jill Fisch, “Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy” (2006) 31 J Corp L 637 (defining it as “the objective of the corporation as maximization of shareholder wealth”); and Ian Lee, “Efficiency and Ethics in the Debate About Shareholder Primacy,” 31 Del J Corp L 533 at 535 (defining it as “the view that managers’ fiduciary duties require them to maximize the shareholders’ wealth and preclude them from giving independent consideration to the interests of other constituencies”).  104 Hansmann & Kraakman, supra note 102 at 439.   33  (3) other corporate constituencies, such as creditors, employees, suppliers, and customers (which, together with shareholders, are included as “stakeholders”) should have their interests protected through contractual or regulatory means rather than through participation in corporate governance;  (4) non-controlling shareholders should receive strong protection from the exploitation of controlling shareholders; and (5) the market value of the publicly traded corporation’s shares is the principal measure of its shareholders’ interests.105 Pointing to the shareholder primacy model’s assumed efficiencies and its historical economic domination, Hansmann and Kraakman contended that the ideological convergence of this model is unlikely to be undone, especially since “no important competitors to the standard model of corporate governance remain persuasive.”106 At the time, American confidence in the shareholder primacy model was at a peak. To Hansmann and Kraakman, the ideological convergence toward the model meant that general convergence in practice will eventually follow – thus signifying, for all intents and purposes, an “end of history for corporate law.” In line with transaction costs theory, economic efficiency was regarded as the main force behind Hansmann and Kraakman’s presumption of the long-term international acceptance of the shareholder primacy model. Profit maximization, historical success, and international competitive advantage are all identified as factors that “made the virtues of [the shareholder primacy] model increasingly salient.”107 Applying the principles of neoclassical law and economics on a global market level, the singular objective of a higher share price within the shareholder primacy model (the “shareholder wealth maximization norm”) is legitimized in                                                  105 Ibid. at 440-441. 106 Ibid. at 456. 107 Hansmann & Kraakman, supra note 102 at 449.   34  theory, providing Adam Smith’s necessary “invisible hand” of self-interest to promote efficient outcomes within the supply and demand of the free market.108  1.3 Three Perspectives Emerging After “End of History” Hansmann and Kraakman’s article was published in early 2001, prior to the fall of Enron Corporation (Enron) and a number of other corporate and accounting scandals that devastated the US financial markets and rippled throughout the globe in the latter half of 2001 through to 2002. Readers are advised to consult the extensive documentation and analysis of Enron’s collapse that is available,109 but in brief, Enron’s bankruptcy resulted from unlawful transgressions by its managers, which included non-transparent financial reporting, mark-to-market accounting, and the creation of complex corporate structures for the sole purpose of concealing billions of dollars in debt.110 Once this information was revealed to the public, the outrage expressed by investors, employees, pension holders, and politicians was palpable.111 Following in rapid succession after the fall of Enron was a series of other American corporate and accounting scandals that brought down several other companies, including most notably                                                  108 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776) 1 Eighteenth Century Collections Online 1.1.2. at I.2.2.  109 Notable scholarly works are included in these footnotes. Enron’s collapse has also been retold in non-fiction books and movies. See e.g. Bethany McLean & Peter Elkind, The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (New York: Portfolio, 2004); Mimi Swartz with Sherron Watkins, Power Failure: The Inside Story of the Collapse of Enron (New York: Doubleday, 2003); Enron: The Smartest Guys in the Room, DVD: (New York: Magnolia Pictures, 2005); Frontline: Bigger Than Enron, 2002, DVD (Boston, MA: WGBH, 2009). 110 For a helpful summary, see e.g. Douglas M Branson, “Enron—When all Systems Fail: Creative Destruction or Roadmap to Corporate Governance Reform?” (2003) 48:4 Villanova L Rev 989 at 997-1002 [Branson, “Systems Fail”]. 111 See e.g. Kevin Anderson, “The Enron Outrage Game,” BBC News (26 February 2002) online: <>.    35  WorldCom,112 whose bankruptcy quickly replaced Enron’s as the largest in history.113 Its downfall was due in part to management falsely inflating revenues and underreporting costs.114 Following Enron’s collapse, there came to be several discussions from legal scholars on the appropriate governmental response to the scandals. Simon Deakin and Suzanne Konzelmann’s short article entitled “Corporate Governance after Enron: An Age of Enlightenment?”115 identifies three groups of opinion that developed after the scandals. The following analysis summarizes Deakin and Konzelmann’s findings and significantly builds upon them by highlighting some of the more persuasive voices from legal scholarship at the time, and categorizing them within Deakin and Konzelmann’s three groups. The first group believed that Enron’s collapse only confirmed the existing model was working and “might actually be a reason to be more confident about corporate America.”116 Enron was an “aberration,” and an example of one bad board did not denote that all boards were                                                  112 Other companies included Tyco International, Adelphia Communications, Peregrine Systems and Global Crossing. 113 See Luisa Beltran, “WorldCom Files Largest Bankruptcy Ever,” CNN Money (22 July 2002) online: <> (which reports WorldCom’s bankruptcy as the largest in the history of the United States with $107 billion in assets, dwarfing that of Enron, which listed $63.4 billion in assets when it filed for bankruptcy). At the time of this writing, the WorldCom bankruptcy is the third largest in history, after the bankruptcies of Lehman Brothers Holdings ($639 billion) and Washington Mutual ($328 billion). See also Research Center: Largest All-Time Bankruptcies, 20 Largest Public Company Bankruptcy Filings 1980–Present, online: <>. 114 See Complaint (Securities Fraud), Securities and Exchange Commission v Worldcom, Inc, No 17588 (SDNY 2002), online: Securities and Exchange Commission <> (which claims that WorldCom disguised its operating performance by using undisclosed and improper accounting that overstated its income by approximately $3 billion in 2001 and $797 million during the first quarter of 2002). 115 Simon Deakin & Suzanne J Konzelmann, “Corporate Governance after Enron: An Age of Enlightenment?” in John Armour & Joseph A McCahery, eds, After Enron: Improving Corporate Law and Modernising Securities Regulation in Europe and the US (Oxford: Hart, 2006) at 155. 116 “Another Scandal, Another Scare,” The Economist (27 June 2002) online: <>. See also Deakin & Konzelmann, supra note 29 at 155.   36  ineffective governance mechanisms.117 This group, echoing laissez-faire market principles, felt that “[m]arket sanctions, in the form of reputational damage to its senior managerial team and to its auditors … served as an effective disciplinary device.”118 William W. Bratton described this group as the “supporters of deregulation,” who found Enron’s collapse to be “an exemplar of free market success.”119 In this sense, “[i]f Enron was a house of cards, it was free market actors who blew it down, with a free market administration keeping its hands off.”120 Once discovered by the public, the false inflation of Enron’s stock price came to an end, and its value within the financial markets quickly depreciated. Because of the swift market reactions to Enron’s exposed activities, proponents of this first position believed there was little to be accomplished with wider reforms to the existing corporate model. Enron’s bankruptcy, then, was a “triumph of capitalism.”121  The second group acknowledged that both managerial and “gatekeeper”122 failures had occurred, and pushed for reform specifically addressing the misdeeds of Enron’s executives and its lack of proper corporate monitoring. This group focused on tightening securities regulation and improving the functioning of the shareholder primacy model, without challenging or                                                  117 See Branson, “Systems Fail,” supra note 110. See also Douglas M Branson, “Enron is an Aberration,” USA TODAY (1 March 2002) 9A.  118 Deakin & Konzelmann, supra note 115 at 155. 119 William W Bratton, “Enron and the Dark Side of Shareholder Value” (2002) 76:5 & 6 Tul L R 1275 at 1281. 120 Ibid. 121 Robert L Borosage, “Enron Conservatives,” The Nation 274:4 (4 February 2002) 4, online: <> (notes that then-Treasury Secretary Paul O’Neill called Enron’s rise and fall a “triumph of capitalism” at 5). 122 Gatekeepers are reputational intermediaries who provide verification and certification services to investors. The term “gatekeeper” is not simply an academic concept. See Securities and Exchange Commission (SEC), Revision of the Commission’s Auditor Independence Requirements, 2000 SEC LEXIS 1389 (Securities Act Release No 7870 on June 30 2000), online: Securities and Exchange Commission <> (where the SEC noted that “[t]he federal … laws … make independent auditors ‘gatekeepers’ to the public securities markets” at 5).    37  restructuring it. Governance failures were traced back to conflicts of interest on the part of board members and its auditors. Many pointed to the false comfort of an independent monitoring board. On paper, Enron had a board that was ideal in several respects; among other favourable qualities, the board was diverse, with only two of their 14 directors classified as insiders.123 Corporate governance issues thus focused on maintaining sufficient director independence and accountability, as well as a subtle shifting of powers from managers back to shareholders. Leading the charge was the Council of Institutional Investors (CII), an organization that in 2002 represented institutional investors holding approximately $2 trillion in pension assets. This group provided a detailed list of accounting and corporate governance reform recommendations “to prevent future Enrons.”124  Many of the CII recommendations, along with other recommendations from the second group, eventually coalesced and led to the creation of the Sarbanes-Oxley Act of 2002125 (SOX Act). The SOX Act was enacted directly in response to the scandals and implemented several new rules and regulations to curtail unwanted corporate behaviour. In particular, it contained provisions addressing director and managerial accountability through financial disclosure,                                                  123 Stuart L Gillan & John D Martin, “Financial Engineering, Corporate Governance, and the Collapse of Enron” (2002) [unpublished, archived at the Social Science Research Network] online: Social Science Research Network <>. 124 Council of Institutional Investors, Press Release, “SWIB Joins Council of Institutional Investors Seeking Reforms to Prevent Future Enrons” (4 February 2002) online: State of Wisconsin Investment Board <> (the SWIB’s recommendations, which were largely adopted by the SOX Act, infra note 39, were as follows: (1) “[r]eform auditor independence standards by prohibiting auditors from providing any non-audit services to their audit clients;” (2) “[r]adically reform the oversight of auditors;” (3) “[r]equire enhanced disclosure of director links to companies;” (4) “[t]oughen the stock exchanges’ listing standards on board independence and board composition;” (5) “[d]o not soften the SEC’s stance on enforcement;” (6) “[r]estore integrity to the proxy voting system by eliminating the stock exchanges’ ‘broker may vote’ rule;” and (7) “[m]eaningfully update disclosure requirements for financial and other critical information”). 125 Sarbanes-Oxley Act of 2002, Pub L No 107-204, 116 Stat 745 (2002) (codified at 15 USC §7201 (2002)) [SOX Act].   38  including the imposition of a duty to disclose “on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English …;”126 greater internal controls, such as stricter standards on the certification of annual and quarterly reports by top executives and a prohibition against share sales by corporate officers during pension blackouts;127 auditor independence, such as rotating the auditor partner every five years;128 as well as the addition of stricter criminal penalties for managers responsible for any violations.129  Deakin and Konzelmann called the perspective of the third group “a radically different explanation for Enron’s fall.”130 While this group generally accepted and approved of the initiatives created by the SOX Act, the underlying belief was that these reform efforts did not go far enough in addressing the root of the problem. Deakin and Konzelmann noted that “[f]rom this [third] perspective, the fate of Enron is less important than the future of the business model which it came to represent ….”131 The group also believed that “[u]nless the regulatory framework is adjusted to make this model unattractive, it will only be a matter of time before the same approach is tried again.”132 The problems of Enron inherently grew from the principles embodied within the shareholder primacy model of the corporation. Members of the senior management of Enron were given stock options that motivated short-term stock appreciation,                                                  126 Ibid, § 409(1). 127 Ibid, § 306(a). 128 Ibid, § 203. 129 Ibid, § 802. 130 Deakin & Konzelmann, supra note 115 at 156.  131 Ibid. 132 Ibid.   39  and their unethical practices exemplified the “dark side” of the shareholder wealth maximization norm.133 Proponents of this third position felt that the model fostered an environment that created oversized incentives, which invited corruption. “[G]overnance standards … [had] declined, particularly those addressed to the numerology of shareholder value,”134 and the artificial inflation of Enron’s stock was revealed only during the downward cycle of a cyclical economy. Clearly, some argued, a reliable corporate governance model should be designed to catch wrongdoing before it causes serious financial damage to shareholders and other stakeholders; therefore, the multiple scandals in 2001 and 2002 only demonstrated how the existing model did not work.135 Deakin and Konzelmann shared this stance, stating:  We believe that this third interpretation of events goes to the heart of the matter …. If we are to take this view seriously, nothing less than a fundamental rethinking of corporate governance practices and procedures is required. Above all, corporate governance must no longer confine its analysis to the relationship between managers, boards and shareholders. The narrowness of this focus is a major contributing factor to the present round of corporate scandals of which Enron is the most emblematic.136 Other scholars, such as Janis Sarra, identified how the scandals signified a real need to reassess other models of corporate governance available throughout the world. When examining governance issues within the global markets shortly following Enron’s bankruptcy, Sarra noted: Although some scholars have claimed that the development of global capital markets will lead to the inevitable triumph of the market-centred system of corporate governance prevalent in Anglo-American law, the recent failures of large, publicly traded corporations in the United States cast doubt on claims of the ultimate superiority of that system. When this doubt is coupled with the existence of other forms of corporate governance throughout the world, the need for closer examination of potential                                                  133 See Bratton, supra note 110 at 1284. 134 Ibid at 1284. 135 See e.g. Jeffrey N Gordon, “Governance Failures of the Enron Board and the New Information Order of Sarbanes-Oxley” (2003) [unpublished, archived at Columbia Law School, Center for Law and Economic Studies] online: Columbia Law School <>.  136 Deakin & Konzelmann, supra note 115 at 156.   40  alternatives or improvements in corporate governance becomes more evident.137 Still others, such as Cary Coglianese and Michael L. Michael, suggested that real corporate governance reform may only be found through the disentrenchment and reinvention of cultural norms, stating: If corporate scandals stem from the same kind of underlying cultural problems that some insist afflict politics, sports, and even religion, then the core challenge for public policy will be to find ways to engender nothing less than a fundamental cultural shift.138 These voices aligned with scholars that had been supporting “counter-hegemonic” discourses on the shareholder primacy model for some time.139 However, voices from this third group supporting structural changes to the shareholder primacy model did not gain much traction on the pathway to reform after the scandals of 2001 and 2002. They were easily outnumbered by those leading the second group and the mainstream push for greater regulation of financial reporting and auditing practices. The discussion during that period surrounded the effectiveness of the SOX Act and the alteration of the rules to curtail unwanted human behaviour within existing governance structures, rather than the possibility of revamping the dominant corporate form.  1.4 Ascendancy of Behavioural Approaches From a law and economics perspective, the scandals marked an interesting period. It is                                                  137 Janis Sarra, “Introduction” in Janis Sarra, ed, Corporate Governance in Global Capital Markets (Vancouver: UBC Press, 2003) at xv. 138 Cary Coglianese & Michael L Michael, After the Scandals: Changing Relationships in Corporate Governance, Regulatory Policy Program Report RPP-09 (Cambridge, MA: Mossavar-Rahmani Center for Business and Government, Harvard University, 2006) at 20, online: Harvard Kennedy School <>. 139 See e.g. Testy, supra note 22 at 1232-40 (for an overview of “counter-hegemonic” discourses). Testy describes “hegemonic” discourse as discussions surrounding the shareholder primacy and wealth maximization model, where “managers’ highest duties are to shareholders and to maximizing their wealth; thus, shareholders must be preferred in the event that a conflict between corporate constituents emerges” at 1231). “Counter-hegemonic” discourse thus seeks to describe alternative visions of corporate law.    41  apparent from Posner’s later writings that he firmly belonged within the first group of scholars supporting free market principles, and not within the second group calling for stricter market regulations to support the existing governance model, or the third group envisioning deep normative and structural reform. In Posner’s 2007 edition of the Economic Analysis of Law, where he directly responded to the corporate events of 2001 and 2002, he stated: [F]raud has long been criminal, and the successful prosecution of the Enron executives suggests that adequate legal tools were in place to deal with such conduct before Sarbanes-Oxley…. As for the receipt by accounting firms of fees for consulting services, as well as for auditing, …[i]t should be enough to require the corporation to disclose to investors the terms of its relations with its auditors, and leave the investors to penalize a corporation by bidding down its stock price if they think the auditor has been ‘bought.’140 Other advocates of the Chicago School generally echoed this sentiment. For example, Gary S. Becker, Nobel laureate and a prominent figure in the Chicago School, argued that if a fully deregulated energy market had been in place, “the Enron political scandal would have been largely avoided” since “[t]he company could not have gamed the system by encouraging politicians to deregulate as it favored.”141 While conceding that the scandal “indicate[d] the need for stricter guidelines on accounting and greater Internal Revenue Service,” Becker pointed out that “stock markets have responded by punishing Enron severely for the company’s transgressions …” and that “flexible prices and competition are far more effective ways to improve energy markets than allowing bureaucrats and politicians to determine the speed and direction of deregulation.”142                                                  140 Richard Posner, Economic Analysis of Law, 7th ed (New York: Aspen, 2007) at 452. 141 Gary S Becker, “Enron Was Mostly Right About One Thing: Deregulation,” Business Week (18 March 2002) 26, online: <>. 142 Ibid.   42  Despite the firm stance by leading scholars in the Chicago School, this controversial period in corporate history provided opportunities for other strands within law and economics scholarship, particularly behavioural approaches, to broaden their audience. Objections to the depiction of human agents as rational actors within the field of law and economics, and especially the Chicago School, had frequently been voiced in the past by both its supporters and its critics.143 The scandals exposed the startling need for greater quantitative and qualitative research surrounding human behaviour in modern finance, while also providing a golden opportunity to apply behavioural approaches to pressing legal issues.144  Schools were eagerly adopting behavioural approaches in response to the concept of the rational, self-interested actor by the Chicago School. Herbert A. Simon’s notion of “bounded rationality,” being “behavior that is intendedly rational, but only limitedly so …,”145 and other approaches addressing limitations within human behaviour146 were increasing in influence.147 Robert Prentice, for example, noted how the scandals supported his continued attempts “to create                                                  143 See Mercuro & Medema, supra note 28 at 102-4. See also Christine Jolls, Cass R Sunstein & Richard Thaler, “A Behavioral Approach to Law and Economics” (1998) 50:5 Stan L Rev 1471 (which noted that “[o]bjections to the rational actor model in law and economics are almost as old as the field itself” at 1473). 144 The field was undergoing a transformative period toward the wider acceptance of approaches extending beyond neoclassical economics, including offshoots that developed from the work of the Chicago School. See e.g. Mercuro & Medema, supra note 28 at 284-90 (which discusses, for example, Guido Calabresi’s influence within what the authors call the New Haven School of law and economics).  145 Herbert A Simon, Administrative Behavior: A Study of Decision-Making Process in Administrative Organization, 2d ed (New York: Macmillan, 1957) at xxiv [Simon, Administrative Behavior] [emphasis in the original]. See also Herbert A Simon, Models of Man: Social and Rational, Mathematical Essays on Rational Human Behavior in a Social Setting (New York: John Wiley & Sons, 1957) [Simon, Models of Man]. 146 See e.g. Jolls, Sunstein & Thaler, supra note 143. 147 This is not to say behavioural law and economics approaches were not already developing prior to the scandals of 2001 and 2002, but rather, that the corporate and accounting scandals allowed them to take centre stage. There have been disagreements as to when and how behavioural economics began. See e.g. Hamid Hosseini, “The Arrival of Behavioral Economics: from Michigan or the Carnegie School in the 1950s and the Early 1960s?” (2003) 32:4 Journal of Socio-Economics at 391. But see Louis Uchitelle, “Following the Money, but Also the Mind: Some Economists Call Behaviour a Key,” The New York Times (11 February 2001) online: <>.   43  more realistic policy prescriptions than have been derived from the Chicago School law and economics reasoning that has dominated the interdisciplinary approach to legal analysis ….”148 As well, Donald Langevoort asserted that “[t]he ones with the explaining to do [following the Enron debacle] are the believers in market efficiency ….”149 He contended that “behavioral finance is somewhat better positioned to test the real world impact of bias in market prices than research in more opaque economic settings,”150 and went on to develop a constructive theory of behavioural securities regulation. It was clear that those pressing for more contextualized critiques to the mainstream Chicago School of law and economics now had the chance to capitalize on those corporate events.  Law and economics scholars that were adopting behavioural approaches around the time of the Enron scandal held, if anything, beliefs in line with the second group, which argued for greater transparency and accountability of directors and managers, and for stricter regulation following the scandals to support the shareholder primacy model. The work of behavioural law and economics scholars generally focused on ways in which the law could promote desired human behaviour within pre-existing structures. The field itself utilizes traditional economic tools and enhances them by providing a better understanding of human behaviour in a market-driven environment. While recognizing that there can be new and innovative prescriptions from these lines of inquiry, following the scandals, behavioural law and economics scholars tended to focus on economic improvements within the boundaries of securities regulation and on                                                  148 Robert Prentice, “Enron: A Brief Behavioral Autopsy” (2003) 40:2 Am Bus LJ 417 at 419-20. 149 Donald C Langevoort, “Taming the Animal Spirits of the Stock Markets: A Behavioural Approach to Securities Regulation” in John Armour & Joseph A McCahery, eds, After Enron: Improving Corporate Law and Modernising Securities Regulation in Europe and the US (Oxford: Hart, 2006) 65 at 66. 150 Ibid at 67.   44  “prescriptions regarding how to make the legal system work better;”151 not on challenging the very structures and institutions in which the law operated.152 Behavioural law and economics served as a useful tool to expose the flaws within the existing model, but the approach was incapable of offering a meaningful alternative.  Nevertheless, the growing movement of behavioural approaches signaled a marked change in law and economics analysis. In a 1998 article, Christine Jolls, Cass R. Sunstein and Richard Thaler noted: “[t]hirty years from now we hope that there will be no such thing as behavioral economics. Instead we hope that economists and economically oriented lawyers will … transform economics into behavioral economics, and economic analysis of law into one of its most important branches.”153 Following the scandals, the study of behavioural effects on economics garnered greater strength and momentum from these market-immobilizing events. George A. Akerlof, for example, argued in his Nobel Lecture on December 8, 2001, a decade after Coase was the recipient and two months after news of the Enron scandal broke, that macroeconomics should be behavioural and that John Maynard Keynes’ General Theory “was the progenitor of the modern behavioral finance view of asset markets.”154 The following year, the selection of Daniel Kahneman as the corecipient of the 2002 Nobel Prize in economic                                                  151 Jolls, Sunstein & Thaler, supra note 143 at 1546. 152 See e.g. Prentice, supra note 148; Jolls, Sunstein & Thaler, supra note 143. 153 Ibid at 1547. 154 George A Akerlof, “Behavioral Macroeconomics and Macroeconomic Behavior” in Peter Englund, ed, Nobel Lectures Including Presentation Speeches and Laureates’ Biographies: Economic Sciences 2001-2005 (New Jersey: World Scientific, 2005) 19 at 37, online: Nobel Prize <>.   45  sciences indicated to many “the ascendancy of behavioral economics.”155 One would think the corporate and accounting scandals of 2001 and 2002 would leave an indelible mark against Hansmann and Kraakman’s claim that the shareholder primacy model was the final resting place of the corporate form. Hansmann himself noted five years after his article with Kraakman that “[t]he most serious argument against the efficiency claim … is that the standard shareholder-oriented model involves too steep a tradeoff between material prosperity and social order …. It is from this perspective that the end of history claim is weakest.”156 It was apparent from the scandals that the human limitations of “bounded rationality, bounded will-power, and bounded self-interest”157 resulted in the identification of the inherent flaws within the perceived transparencies and efficiencies in the financial market. Following those events, many felt a behavioural approach to law and economics offered a better way of addressing human weaknesses in regulatory design, but the approach contained few positive prescriptions for the development of an alternative, competing model. The burden continued to rest on lawmakers’ abilities to adequately protect stakeholder interests through securities regulation, and not on the corporate governance model itself. The scandals were potentially damaging to the reputation of the shareholder primacy model, and certainly showed the weakness in relying on market principles to regulate corporate behaviour, but its continued survival only solidified Hansmann and Kraakman’s argument that the model had lasting acceptance within American ideological thought.                                                   155 Peter H Huang, “Regulating Irrational Exuberance and Anxiety in Securities Markets” in Francesco Parisi & Vernon L. Smith, eds, The Law and Economics of Irrational Behaviour (Stanford, CA: Stanford University Press, 2005) 501 at 502. 156 Henry Hansmann, “How Close is the End of History?” (2006) 31:3 J Corp L 745 at 747-48. 157 Jolls, Sunstein & Thaler, supra note 143 at 1476. See also Simon, Administrative Behavior, supra note 145 at xxiv-xxvii; Simon, Models of Man, supra note 145 at 196-206.    46  1.5 Perspectives in the Aftermath of the Global Financial Crisis The three positions identified by Deakin and Konzelmann following the scandals of 2001-2002 should have contrasting notes in the aftermath of the global financial crisis (GFC). The scandals of 2001-2002 involved conduct by management that was clearly in violation of law, whereas the main factors leading to the GFC were due to corporate actions that were legally permissible,158 thus the fault cannot be said to rest solely upon the unlawful actions of a few greedy executives.159 The position of the first group, which held that market sanctions alone were effective disciplinary devices, cannot seriously be considered any longer due to the GFC.160 In fact, the GFC may have destroyed the very premise on which this position rests. In its aftermath, there were countless normative arguments searching for blame as to who ‘caused’ the GFC and subsequent economic recession, leading to an interesting account as to where the theoretical differences lay amongst business scholars in pinpointing the location of “capitalism’s fault lines.”161  US President Barack Obama did not mince words, laying blame on “the perfect storm of irresponsibility and poor decision-making that stretched from Wall Street to Washington to Main                                                  158 Corporate executives were questioned for conducting unlawful activity, such as CEO Ian McCarthy of Beazer Homes USA Inc., who was under SEC investigation for lying about borrowers’ qualifications, see TIME Magazine, “25 People to Blame for the Financial Crisis”, online: <>. McCarthy was never criminally sanctioned.    159 In Carol Liao, “Corporate Governance Reform for the 21st Century: A Critical Reassessment of the Shareholder Primacy Model” (2012) Ottawa L Rev 187, I examine two factors that contributed to the collapse of the US subprime mortgage market: the repeal of the Glass-Steagall Act and the originate-to-distribute model of lending. The examination reveals how the shareholder primacy model played a key role in the onslaught of the global financial crisis by incentivizing the obstruction of efficient regulation and encouraging corporate behaviour that perpetuates the likelihood of future crises.  160 See Section 1.3 at ftns. 116-121.  161 Borrowing from Jonathan Rauch, “Capitalism’s Fault Lines” (14 May 2009) The New York Times BR11.    47  Street.”162 Paul Krugman, in his September 2009 article in The New York Times, “How Did the Economists Get It So Wrong?” blasted economists like Olivier Blanchard, now chief economist at the International Monetary Fund, for “clinging to the vision of capitalism as a perfect or near perfect truth.”163 Blanchard had written an article in 2008 declaring that “the state of macro[economics] is good” and, in a tone reminiscent to Hansmann and Kraakman’s “End of History,”164 argued that there had been a “convergence in vision and methodology” for macroeconomics.165 Krugman in his critique writes, “[t]he renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives,” but ultimately this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.166  Richard Posner also sought to pinpoint the cause of the GFC, finding the large apportionment of blame laid upon capitalism to be misdirected. In his 2009 book examining the GFC and what Posner called “the descent into depression” he remarks on how “laissez-faire capitalism failed us,” but posing the question upon himself as to who was more responsible, industry or government, Posner emphatically believed the responsibility lay with the                                                  162 Ibid. 163 Paul Krugman, “How Did Economists Get It So Wrong?” The New York Times (2 September 2009) at MM36. 164 Hansmann & Kraakman, supra note 102. 165 Olivier Blanchard, “The State of Macro,” (2008) National Bureau of Economic Research Working Paper 14259, online: <>. 166 Krugman, supra note 163.   48  government. For Posner, “the government allowed the preconditions of depression to develop and wreak havoc with the economy”167 and it was the government who provided “late, slow, indecisive, and poorly articulated” responses to the GFC.168 Directing a pointed attack at Krugman, Posner stated that “the journalists and politicians, and some who should know better, like the distinguished macroeconomist Paul Krugman, are engaged in an orgy of recrimination against Wall Street. They have the wrong target. The responsibility for building the fences that prevent an economic collapse as a result of risky lending devolves on the government.”169  Posner was careful in distancing himself from scholars that have applied behavioural analysis in the autopsy of blame. He insisted that those on Wall Street were acting rationally, calling media coverage of Wall Street greed and extravagance as “ignorant” and “silly”, and rhetorically asking “What did reporters think businessmen were like?”170 Posner was very skeptical that “readily avoidable mistakes, failures in rationality, or the intellectual deficiencies of financial managers whose IQs exceed my own were major factors in the economic collapse.”171 He insisted that blame rested on the lack of regulation by the government, and not the “rational” actions conducted by individuals which ultimately led to the GFC, stating: By having over a period of decades [deregulated banking and credit], the government inadvertently allowed the rational self-interested decisions of private actors – bankers, mortgage brokers, real estate salesmen, homeowners, and others – to bring on a financial crisis that the government was unable to prevent from molting into a                                                  167 Richard Posner, A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression (Cambridge: Harvard University Press, 2009) at 236. 168 Ibid. 169 Ibid. at 285. 170 Ibid. at xiii. 171 Ibid. at 77.   49  depression. A profound failure of the market was abetted by governmental inaction.172 Posner’s position is helpful in highlighting foundational arguments that supporters of the shareholder primacy model generally hold. First, Posner identified reckless behaviour – as clearly evidenced in the actions leading up to the GFC, such as the originate-to-distribute model of lending173 – as rational, predictable human behaviour. The stylized normative ideal of self-interest as the epitome of good business requires strong regulation and other internal and external pressures to curtail inevitable wanton behaviours from producing social and environmental harms. Posner adheres to this position in his analysis – calling on the paucity of government regulation as a main culprit in the onset of the GFC. His support of greater regulation in the financial arena seems ignores the political-economic realities of powerful, immense, and unrelenting lobbying efforts by large institutions on American lawmakers whenever issues regarding their regulation and governance are at stake,174 as well as “regulatory capture.”175 Lastly, Posner’s position seems to be almost an about-face to the standard deregulatory position regarding the government’s role which has traditionally been favoured by the Chicago school, including after the Enron scandal.176 This inconsistency seems to frequent the analysis of those                                                  172 Ibid. at 242-243. 173 The originate-to-distribute model of lending allowed financial institutions to reduce their capital charges and transfer the risks associated with securitized loans to a market hungry to buy them. The strategy worked as follows: (i) originate consumer mortgage loans; (ii) package the loans, in tranches, into mortgage-backed securities and collateralized debt obligations; (iii) create additional over-the-counter derivatives whose values are derived from the underlying loans; and (iv) distribute the repackaged securities to investors. Arthur Wilmarth, “The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis” (2009) 41 Conn L R 963. 174 Public choice theorists have commented on the socially perverse effects of lobbying, see e.g. James D Gwartney and Richard E Wagner, “Public Choice and the Conduct of Representative Government” in James D Gwartney and Richard E Wagner, ed., Public Choice and Constitutional Economics (Greenwich: JAI Press, 1988) at 3-28. 175 See infra ftns. 413 and 414. 176 See for example, Becker, supra note 141, where Becker argued that Enron could not have gamed the system in a deregulated energy sector.   50  typically in strong deregulation stance held prior to events of financial turmoil. Since writing his book detailing the GFC in 2009, Posner wrote another book, The Crisis of Capitalist Democracy, where he conceded that he and the Chicago school erroneously believed that “markets were perfect, which is to say self-regulating, and government regulation in them almost always made things worse.”177 He now believes the GFC showed that pure market competition “can cause people to take reckless and irrational risks, with short-term profit-maximizing behaviour jeopardizing society’s long-term interests” (a point that one reviewer has noted, is “hardly a revelation”).178 He berates the three major CRAs of Moody’s, S&P, and Fitch, arguing they should lose their quasi-official status for their role in perpetuating the GFC179 and surprisingly suggests, among other things, that reinstating the Banking Act of 1933,180 popularly known as the Glass-Steagall Act (GSA) is a viable and realistic solution.181 As other schools of thought gain greater traction and forward trajectory in challenging the status quo, the Chicago school of law and economics may need to clarify its normative stance on regulatory policies in a post-GFC climate.   Still, Posner’s strong reproach of governmental inaction during the GFC did not mean                                                  177 Richard Posner, The Crisis of Capitalist Democracy (Cambridge: Harvard University Press, 2010). 178 Don Tapscott, “Bubble Brains” The Globe and Mail (23 April 2010), online: <>.  179 Posner, supra note 177 at 349. 180 Banking Act of 1933, 48 Stat. 162. 181 Ibid. at 353-354. The GSA had restricted commercial banks from any involvement in the securities industry, thus creating a firewall between commercial banking and investment banking. On November 12, 1999, then-U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Act (otherwise known as the Financial Services Modernization Act of 1999, Pub L 106-102, 11 Stat 1338), which repealed some of the key elements of GSA so that banks could thereafter be affiliated with securities firms.     51  he shied away from recognizing the GFC was also “a failure of capitalism” and the unfettered market. Deakin and Konzelmann’s first position examined in response to the scandals of 2001-2002 – being the belief that free market sanctions are sufficient in times of financial turmoil – is now on tenuous ground. It was almost simple to call Enron an aberration and leave things as-is. However, the GFC cannot be called an aberration, a market hiccup, or a normal “bubble” that burst. The $700 billion bailout and stimulus package by the US government has significantly limited the viability of that argument. The GFC has thus caused many belonging in the first group following the scandals of 2001-2002, including Posner, to strongly shift into the second group focused on improving corporate behaviour through the tightening of securities regulation.  It seems that at a minimum, the influence of American culture on the world is at least passively settled with the shareholder primacy model as it currently exists. Governments are responsible for adjusting legal rules to restrain certain incentives that guide the existing model. If corporate conduct causes negative ramifications to society without appropriate regulation to address it, the solution is to create reactionary law to address and prevent such specific conduct from recurring in the future. It suggests a cyclical pattern of disaster and reactionary lawmaking will always accompany the financial markets if the shareholder primacy model is here to stay and market forces are expected to police. This pattern is particularly concerning as innovative financial products are produced with a level of rapidity and complexity that has regulators struggling to keep up. It is apparent from our recent history (and we see how one does not have to reach too far into the past to prove this point again and again) that market forces cannot be relied upon to ensure corporations help to advance the social economy.  1.6 Global Convergence Debate Hansmann has acknowledged that his article with Kraakman was written with the   52  intention to provoke.182 Yet, the question remains as to whether there has been global convergence in corporate governance norms. It is apparent from the wide array of articles addressing global convergence that the debate is far from settled. However, while convergence towards the Anglo-American shareholder primacy model was heavily deliberated in the late 1990s when the American economy was booming and the possibility of convergence seemed “irresistible,”183 the force behind both sides seems to have lessened of late. This may be due to the economic times – the GFC, the European sovereign-debt crisis, a fluctuating global economy, the growth of multinational enterprises, and the emergence of China as the new economic superpower may have shifted the focus for legal scholars. This section explores the arguments within this debate and examines whether, given these changes in the global landscape, a temporary consensus regarding convergence is feasible and if so, whether this consensus is conducive to future reformation of shareholder primacy, and/or negates the relevance of new innovative corporate structures challenging the status quo.  1.6.1 Convergence is Likely The globalization of capital markets, the growth of institutional investors, and increasing international competition have provided significant market pressures for the global convergence of governance norms toward the shareholder primacy model. Shareholding is increasing internationally, particularly due to the globalization of private finance and the privatization of public enterprise.184 Domestic stock markets are being deregulated, which has                                                  182 Hansmann, supra note 156 at 745. 183 Thomas Clarke, ed., Theories of Corporate Governance (New York: Routledge, 2004) at 205. 184 Michael Useem, “Corporate Leadership in a Globalizing Equity Market” (1998) 12 Acad Mgmt Exec 43 at 45-46.   53  typically entailed an easing of restrictions on foreign ownership of brokerage firms. This has resulted in cross-border stock exchange listings and the growth the cross-border financial diversification.185 Because of increased international investor activism, there has been pressure to create global standards of corporate disclosure and governance. Michael Useem has noted that most financial experts prefer companies throughout the world to observe shareholder rights, maximize shareholder value, and provide adequate transparency and disclosure in their reporting of corporate activities.186 Institutional investor activism has resulted in American and British international equity managers supporting efforts to create more uniform transnational disclosure policies, accounting principles, and governance practices. Ongoing dialogue among national executives and managerial transplants across nations has created an exchange of ideas and norms.187 Hansmann and Kraakman as well have found that “…the persuasive power of the standard model has been amplified through its acceptance by a worldwide network of corporate intermediaries, including international law firms, the big five accounting firms, and the principal investment banks and consulting firms – a network whose rapidly expanding scale and scope give it exceptional influence in diffusing the standard model of shareholder-centered corporate governance.”188  In response to the growth of institutional investor activism, several organizations have designed global governing principles, which include: (1) the OECD Principles for Corporate Governance (OECD Principles), aimed at assisting                                                  185 Ibid at 47-8. 186 Ibid at 51. 187 Ibid at 49-55. 188 Hansmann & Kraakman, supra note 102 at 449.   54  governments improve the regulatory frameworks for corporate governance;189 (2) the World Bank framework for implementing good corporate governance practices in emerging market economies;190 (3) the International Corporate Governance Network’s Global Corporate Governance Principles (ICGN Principles), which “are intended to be of general application around the world, irrespective of legislative background or listing rules”;191  (4) the International Financial Reporting Standards, providing global accounting standards requiring transparent and comparable information in financial statements and other financial reporting;192 and (5) the United Nations Principles for Responsible Investing (UNPRI), with the goal of understanding the implications of sustainability for investors while supporting voluntary signatories to incorporate these issues into their investment decision making and ownership practices.193 Sarra has noted that the OECD Principles focus on four key themes: (1) shareholder rights and equitable treatment of shareholders; (2) disclosure and transparency to enhance accountability; (3) the role of other stakeholders; and (4) the responsibility of corporate boards.194 These themes also resonate in the framework provided by the World Bank and the ICGN Principles, and the International Financial Reporting Standards help to bolster the disclosure and accountability component of those themes. In its preamble, the World Bank argues for the adoption of globalized governance principles in developing market economies in order to combat poverty. It notes that:                                                  189 OECD, “OECD Principles for Corporate Governance” (2004 edition), online: OECD <>. 190 World Bank, “Corporate Governance: A Framework for Implementation” (1999), online: Sovereign Global <>. 191 International Corporate Governance Network, “Global Corporate Governance Principles” (2009 edition), online: ICGN <>. 192 International Financial Reporting Standards (2011), online: IFRS <> 193 Principles for Responsible Investing, online: <>. 194 Janis Sarra, “Convergence versus Divergence, Global Corporate Governance at the Crossroads: Governance Norms, Capital Markets & OECD Principles for Corporate Governance” (2001) 33 Ottawa L Rev 177 at 208.   55  [i]ncreasingly for developing and transition economies, a healthy and competitive corporate sector is fundamental for sustained and shared growth….[I]ndividual investors, funds, banks, and other financial institutions base their decisions not only on a company’s outlook, but also on its reputation and its governance. It is this growing need to access financial resources, domestic and foreign, and to harness the power of the private sector for economic and social progress that has brought corporate governance into prominence the world over.195  Sarra as well has pointed to the growing acceptance that the adoption of key governing principles by nation states are a precursor to obtaining an enhanced flow of capital investment to their economies.196 While the above listed organizations have not specifically addressed which governance structure they are modeling (and the OECD “has suggested that it has resisted endorsement of one type of corporate governance structure”), Sarra points out that “the [OECD] Principles are remarkably close to those that shape Anglo-American governance structures and theory.”197  The opening up of domestic corporate governance norms and laws to global capital markets as well as “the mobility of capital, mergers, cross-listing on international stock exchanges, the move to international accounting standards, and the global transfer of both debt and equity” provide continual market pressure towards convergence.198 These norms include “protection of foreign shareholder rights, greater financial disclosure, regulated securities and lending markets, effective director oversight, and judicial systems that enforce these rights.”199 Sounding the battlecall for supporters in many respects, Hansmann and Kraakman predict that                                                   195 World Bank, supra note 190 at 2. 196 Sarra, supra note 194 at 205. 197 Ibid. at 222. 198 Ibid. at 206.  199 Ibid.   56  as equity markets evolve in Europe and throughout the developed world, the ideological and competitive attractions of the model will become indisputable, even among legal academics. And as the goal of shareholder primacy becomes second nature even to politicians, convergence in most aspects of the law and practice of corporate governance is sure to follow.200  Useem contends that, while the convergence process may ebb and flow and be lengthy, given the accumulating assets and powers of the institutional holders and their movement onto the world stage, convergence “appears inevitable.”201 Within the pro-convergence camp, the question has focused on whether convergence will be ‘formal’ through the wholesale adoption of the Anglo-American shareholder primacy model in other nations, or a ‘functional’ convergence of best practices.202 Regarding the possibility of functional convergence, John Braithwaite and Peter Drahos have offered insights from their empirical research on how “[g]lobalized rules and principles can be of consequence even if utterly detached from enforcement mechanisms.”203 As a substitute for state enforcement and the incorporation of norms, standards, principles, and rules into positive law, the key enforcement mechanism is in modeling.204  1.6.2 Convergence is Unlikely or Irrelevant On the flip side, there are several arguments against the prediction of convergence. The first is due to path dependence, which is also discussed further in Chapter 2. In general, the view is that corporate governance systems are tightly coupled with path dependent regulatory laws                                                  200 Hansmann & Kraakman, supra note 102 at 468. 201 Useem, supra note 184 at 220. 202 See e.g., John Coffee, “The Rise of Dispersed Ownership: The Roles of Law and the State in the Separation of Ownership and Control” (2001) Yale LR 70. 203 John Braithwaite & Peter Drahos, Global Business Regulation (Cambridge: Cambridge University Press, 2000) at 10. 204 Ibid. at 10, 25.   57  that are unlikely to be modified in the near future. Corporate governance models cannot be seen in isolation from other institutional factors and normative underpinnings within nations. Legally, corporate law “is intimately related not only to social custom but also to other legal areas, such as banking, labor, tax, and competition law.”205 Sarra has outlined how path dependence shows how governance models are reflective of the historical, legal, and political frameworks in which they operate rather than a pull towards efficiency, all the while “reflecting enormous power inequities.”206 Mark Roe as well has pointed out that “the American governance structure is not inevitable” and that “we must consider the role of politics, history, and culture.”207 Political and economic interests are heavily intertwined with existing corporate structures, and given political dynamics, social movements, and other factors external to corporate law, convergence should not be assumed. Elites within nations will be unwilling to subvert their existing positions and path dependence will create “formidable pressures for continuity” of structures that have delivered efficiency in the past.208  In support of the path dependence argument, Douglas Branson has remarked that the “one size fits all” approach of convergence advocates is culturally and economically insensitive. He is critical of existing convergence scholarship which he feels is lacking in evidence and is “highly inbred” in that a few scholars in a handful of elite institutions cite one another’s work                                                  205 Mauro Guillén, “Corporate Governance and Globalization: Is There Convergence Across Countries?” (2000) 13 Advances Int’l Comp Mgmt 175 at 178. 206 Sarra, supra note 194, citing Bebchuk and Roe at 48. 207 Mark Roe, “Some Differences in Germany, Japan, and the United States” (1993) 102 Yale LJ 1927 at 1989, 1997. 208 Martin Rhodes & Bastiaan van Apeldoom, “Capital Unbound? The Transformation of European Corporate Governance” (1998) 5 J of Eur Pub Pol 406 at 414.   58  almost exclusively, while ignoring other research.209 He notes that value systems in China are still firmly based on post-Confucianism and tradition and “a high degree of abnegation of self and tolerance and patience for others,” thus creating insurmountable barriers to the import of American corporate governance principles which require “a certain degree of confrontation and a high degree of individualistic behavior.”210 Ron Davis has also observed how “it seems logical that if culture informs corporate behaviour, then the convergence thesis is less compelling and may be restricted to those nations whose cultures are similar.”211 Branson points out that the dominant forms of ownership in the world remain family ownership and other forms of embedded capitalism in which the economy is perceived to be subservient to the society, rather than the opposite.  Branson goes further to suggest that the issue of global convergence is extraneous in the face of the more pressing problem of the century, being problems associated with the growth and regulation of the multinational enterprises (MNEs).212 This issue has also been identified by Davis, who notes that MNEs are not currently held accountable for any harmful conduct in host nations that may result in human, political, and social rights harms and environmental degradation.213 He finds that while there is potential for institutional investors to limit harmful externalities from these MNEs, there are problems associated with this type of control and a form                                                  209 Douglas Branson, “The Very Uncertain Prospects of ‘Global’ Convergence in Corporate Governance” (2001) 34 Cornell Int’l LJ 321 at 325. 210 Ibid. at 268. 211 Ronald B Davis, “Fox in S-OX North, A Question of Fit: The Adoption of United States Market Solutions in Canada” (2004) 33 Stetson L Rev 955 at 957. 212 Branson, supra note at 334. 213 Ron Davis, “Investor Control of Multinational Enterprises: A Market for Corporate Governance Based on Justice and Fairness?” at Janis Sarra, ed, Corporate Governance in Global Capital Markets (Vancouver: UBC Press, 2003) at 131.   59  of public regulation is needed.214 The OECD Guidelines for MNEs may be of significant help in that regard.215 Branson contends that these problems associated with globalization are critical to address, and the “sheer power and size” of MNEs force the question as to whether the debate about convergence within nation states is now irrelevant.216  1.6.3 Considering the Empirical Evidence Of course, the empirical evidence on convergence is important to consider in the debate. Unfortunately, cross-national studies are limited and also somewhat difficult to assess for a number of reasons. Mauro Guillén has commented that the key problem is the dearth of empirical indicators for relevant dimensions. He remarks that earlier studies “vary in terms of the range of indicators used, the nature of the indicator (quantitative or qualitative), and the number of countries included.”217 The most well-known empirical research on global corporate governance patterns is from the economists Rafael La Porta et al, who in a series of articles documented empirically the relationship between the law and economic growth, the development of markets, and the governance of firms. La Porta et al examined levels of legal protection for shareholders using detailed data from nearly 50 countries, under classifications of French, German, Scandinavian, and common law traditions. They found there was a correlation between strong legal protection for shareholder rights and dispersed shareholder ownership, as well as a correlation between weak protection and more concentrated ownership. They claimed their results showed that attributes found in the common law tradition, being strong legal protection                                                  214 Ibid. at 147-149. 215 OECD, supra note 189. 216 Branson, supra note 209 at 335. 217 Guillén, supra note 205 at 181.   60  and the resulting diffuse ownership, were more likely to foster an environment attractive to private-sector investment. If strong legal protection for shareholders is not present, then there were adverse consequences for financial development and growth.218 While their work did not directly address the convergence debate, it provided support for later claims regarding the superiority of the shareholder primacy model within the common law tradition. Guillén also produced longitudinal evidence from both advanced and newly industrialized countries using indicators that spoke to “the tenets of the globalization thesis about convergence in corporate governance, and to the legal, institutional, and political cases against convergence.”219 Following the classification of countries by La Porta et al in terms of legal tradition, Guillén’s research found that the proportion of the world’s stock of outward foreign investment accounted for by the Anglo-Saxon countries is falling, from 66 per cent in 1980 to just over 50 per cent in 1997. Meanwhile, the combined shares of countries influenced from German, French, or Scandinavian legal traditions have grown from 34 to 49 per cent over the same time period.220  He concluded that his research found “[c]orporate governance patterns continue to differ markedly across countries in spite of decades of economic globalization and 20 years of intense financial globalization.”221 Stemming from this finding, Guillén remarked that “…if there is convergence in corporate governance, it may not be on the shareholder-centered model                                                  218 Rafael La Porta, F Lopez-de-Silanes, A Shleifer, & RW Vishny (1998) “Law and Finance” (1998) 106 J Pol Econ 1113 at 1152. 219 Guillén, supra note 205 at 229. 220 Ibid. at 231; emphasis in original. 221 Ibid. at 223.   61  characteristic of the United Kingdom or the United States but rather on some kind of hybrid.”222 He found it safe to conclude that the wholesale convergence of corporate governance systems across countries is unlikely in the near future. Convergence along selected aspects or dimensions is more likely, although it has thus far affected only a handful of countries.223  A 2009 study was also conducted by Marina Martynova and Luc Renneboog, which provides a comprehensive comparative analysis of corporate governance regulatory systems and their evolution over the last 15 years in 30 European countries and the United States. To Martynova and Rennboog’s knowledge, it is the first study to provide empirical research specifically addressing the convergence debate (but of course, note Guillén above). Their analysis is based on a database which comprises of the main changes in corporate governance regulations in the United States and all European countries between 1990 and 2005. The indices indicate how each country’s laws address potential agency conflicts between corporate constituencies, particularly between (i) shareholder and managers; (ii) majority and minority shareholders; and (iii) shareholders and bondholders. In contrast to the ranking system by La Porta et al, they believe their indices reflect a broader scope of governance regulation reforms and their dynamics.224  Their results are revealing. Martynova and Rennboog found that “virtually every country from [their] sample has been involved in substantial changes in their corporate                                                  222 Ibid. at 231-250. 223 Ibid. at 236. 224 Marina Martynova & Luc Rennboog, “A Corporate Governance Index: Convergence and Diversity of National Corporate Governance Regulations” (2010) Tilburg University Discussion Paper Series No. 2010-17 at 22.   62  legislations since 1990.”225 Reforms related to increased transparency have been made to address agency problems between shareholders and managers, and the protection of minority shareholders from expropriation by a strong shareholder. They also found signs of increasing convergence by national corporate governance regulations towards a shareholder primacy model where the protection of minority shareholders is considered.226 This led to their prediction that legislative amendments in countries with French and German legal traditions may bring about more diffused ownership in the foreseeable future. Limited convergence was found in countries of Scandinavian tradition and former communist countries, which have mainly stakeholder-based systems that Martynova and Rennboog predict will be maintained. They found that “[o]ver the past 15 years, Scandinavian countries have substantially lagged other West European countries in terms of increasing the level of (minority) shareholder rights protection, such that their legal reforms may be insufficient to induce changes in corporate control.”227 Former communist countries, on the other hand, tended to favour greater minority shareholder protection. Nevertheless, since both Scandinavian and former communist countries altered creditor rights in cases of financial distress and bankruptcy, Martynova and Rennboog guessed that it may impede on their development of efficient equity markets and hence any convergence. They conclude by stating that countries of common law tradition still provide the highest quality of shareholder protection while many continental European countries have improved their legal system up to the standard set by the                                                  225 Ibid. at 23. 226 Ibid. 227 Ibid.   63  Anglo-American model.228  Martynova and Renneboog’s study only showed how there was convergence among the US and Europe, thus classifying their results as indications of “global” convergence is premature. Studies from Guillén, who built upon La Porta et al’s work, as well focused only on countries that could be classified under Anglo-Saxon, French, German, and Scandinavian legal traditions. None of the empirical studies above included China in their analysis. 1.6.4 A Middle Ground There seems to be some consensus within academic scholarship that the wholesale import of the Anglo-American model in developed countries is unlikely.229 Equally so, there is no denying that there has been some level of convergence in governance principles within several countries in Europe and elsewhere. Thus, a middle ground of conceding to partial convergence seems a plausible temporary resting place in the debate; more detailed analysis within particular countries may allow for stronger positions one way or the other. While this may be sufficient to quell the debate for now, Christopher Nicholls has observed that “[t]he difficulty is that both convergence and nonconvergence stories can plausibly explain observed international developments to date, leaving those of us who are not content to substitute dogma for analysis in the uncomfortable position of not knowing in which direction public policy and law ought properly to be nudged.”230 Sarra has commented that “the principles of transparency,                                                  228 Ibid. at 24. 229 With the exception perhaps of Hansmann and Kraakman, supra note 102. 230 Christopher C Nicholls, “Governance, Mergers and Acquisitions, and Global Capital Markets” in J. Sarra, ed., Corporate Governance in Global Capital Markets (UBC Press, 2003) at 89.   64  accountability, fairness and responsibility appear to have wide application,”231 and makes the strong argument that path dependence and market convergence theory are not mutually exclusive.232 Thus, a middle ground and “partial convergence” seems to be the most reasonable position to take on this debate at the present time and in the foreseeable future. This position most accurately reflects available data, while indirectly also proffers space for there to be reformation and change to the mainstream Anglo-American model. Partial convergence suggests that nations still have the capability to influence change within their jurisdictions, with the potential for international consequences depending on the circumstance. The argument that there has been an “end of history for corporate law” is not supported by the evidence, and there is merit in seeking more effectively designed corporate conduits to influence economic and social ordering for the betterment of society, however one may perceive that to be.    1.7 Shareholder Primacy Then and Now The findings in this chapter offer important takeaways. We saw how economic efficiency and the nexus of contracts are viewed as justifications behind the existence of the corporate form. As to how one should regulate and govern the corporation given its purpose, recent financial crises have led to a general acceptance of integrating behavioural economic approaches into traditional neoclassical concepts. The defence of economic efficiency is weak when myopic corporate behaviour leads to widespread negative externalities that affect not only shareholders but the broader community. Finally, Anglo-American corporate legal theory is not stagnant, but develops alongside the evolution of scholarly thinking in reaction to real life events and circumstances.                                                   231 Sarra, supra note 194 at 222. 232 Sarra, supra note 101 at 48.   65  As for the claim that corporate law is at the end of its history, the empirical evidence suggests that it is unlikely there will ever be complete convergence into shareholder primacy. But there seems to have been international agreement that certain principles are ideal in the governing of corporations, which as noted include transparency, accountability, fairness, and responsibility.233 Perhaps one day it may seem natural for ‘sustainability’ or ‘social innovation’ to reach that list of general principles idealized by the international community in the governing of corporations, just as ‘fairness’ and ‘responsibility’ have. Geographic, cultural, and other limitations that have prevented widespread convergence of these principles mean individual jurisdictions are well served by looking at their particular corporate legal offerings to ensure that these principles, and even more aspirational ones, reach would-be entrepreneurs in the governing and operation of their businesses.  The recent financial calamities that have plagued the first decade of the 21st century are only some examples of how the inner workings of shareholder primacy can lead to immensely flawed results.234 And while the arguments and examples of large corporate scandals seem most relevant for public companies with diffused ownership and professional management, it is important to note that closely-held firms are certainly susceptible to scandal as well.235 If the purpose of the corporate form is economic efficiency, then why do these profoundly inefficient results come about? At best, the corporate form can foster a place for dynamic, innovative ideas                                                  233 Ibid. 234 See Liao, supra note 159.  235 For example, the 2015 family-owned firm of Volkswagen Aktiengesellschaft (Volkswagen) was issued a notice of violation of the Clean Air Act, 42 U.S.C. §7401 et seq. (1970), by the US Environmental Protection Agency after it found that the company had intentionally programmed turbocharged direct injection diesel engines to activate certain emissions controls only during laboratory emissions testing. Volkswagen is controlled by the Piëch family with a significant stake held by the German state of Lower Saxony. See Guilbert Gates et al, “Explaining Volkswagen’s Emission Scandal” The New York Times (12 September 2016), online: <>.   66  to grow – but this innovation can outpace regulation and that is where self-governance is critical. At worst, corporations enable the singular profit-making objective which perpetuates amoral and immoral behaviour, with the only real obligation being to operate within the confines of the law. This model of corporate governance needs to be reformed. Milton Friedman’s famous 1970’s position in The New York Times that the “social responsibility of business is to increase profits,”236 has been labeled the “dumbest idea in the world”237 with countless naysayers that have attacked and debunked the validity of his argument. Nevertheless, the mentality that corporations exist solely for its shareholders and/or that its sole purpose is to produce a profit is immensely difficult to shake. Chapter 2 looks at the some of the longstanding critiques and dominant counter-hegemonic voices that have appeared in the decades alongside the shareholder primacy model. These critiques have underscored some of the broader movements in CSR and SRI to reform the traditional corporate model, but the road to transformative corporate reform is particularly difficult given how entrenched certain ideological beliefs are within society. These ideologies and path dependence are identified as some of the significant barriers which justify the exploration of alternative legal means to illicit social change.                                                     236 Friedman, supra note 8.  237 Steve Denning, “Salesforce CEO Slams ‘The Dumbest Idea in the World’: Maximizing Share Value,” Forbes (5 February 2015), online: Forbes <>.   67  CHAPTER 2: Critiques to Shareholder Primacy and Limits to Reform The shareholder primacy model of governance is not without its critics. While Henry Hansmann and Reinier Kraakman asserted in 2001 that corporate law has reached the end of its history, the fact is that unforeseeable events are generally not calculated in such theories. After the fall of Enron, scholars wondered if the catastrophic market events would “usher in a new age of enlightenment” to corporate governance reform.238 Yet, the ideological entrenchment of the shareholder primacy model seems firmly implanted in Anglo-American culture, as its steadfast existence in history can attest. Section 2.1 explores some of the predominant counter-hegemonic critiques of shareholder primacy that have developed in the past several decades, particularly stakeholder theory and CSR, including the codification of CSR in the UK’s ‘enlightened shareholder value’ and SRI movement, progressive corporate law, and team production theory. Section 2.2 lays out some of the specific challenges that are faced with reforming the shareholder primacy model, which, regardless of the validity of one’s theoretical arguments, perpetuate the perceived economic viability and continued domination of this mainstream model. These factors include entrenched ideological beliefs that have permeated the psyche of corporate governance practices in global capital markets, and path dependence. This then poses the interesting follow-up question, which is whether alternative corporate legal structures may be able to offer a new method of tackling the problems generated from within the shareholder primacy model of governance.  2.1 Critiques to Shareholder Primacy The 1931–1932 exchange in the Harvard Law Review between Adolf Berle and E.                                                  238 Deakin & Konzelmann, supra note 115 at 583.   68  Merrick Dodd is considered by many as the start of the ongoing debate between two views of the corporation: (1) shareholder primacy, in which management works for the best interests of the shareholders, and (2) CSR, where corporations should operate in a socially responsible manner.239 Both scholars accepted the position that corporate directors act as trustees, however, Dodd argued for “a view of the business corporation as an economic institution which has a social service as well as a profit-making function,” claiming to identify an emerging public consensus that corporations should operate as “good citizens.”240 Berle replied that discarding a specific duty to shareholders, without substituting a reasonably clear alternative mandate, would impart too much discretion to management and lead to vast, uncontrolled power with no reason to assume it would be used responsibly.241 A few decades later, Berle accepted that Dodd’s position had at least temporarily prevailed, as he observed actual practice and common law decisions had over time accepted Dodd’s general viewpoint against a stricter fiduciary duty.242 David Millon describes how “by then it had been established in practice and in law that corporations were free to engage in philanthropy, despite objections that they were spending shareholders’ money. There was no need to show that such expenditures were at least in the long run enhanc[ing] corporate profits.”243 Nevertheless, historical events would frequently create a push-and-pull over the                                                  239 The debate began with Adolf Berle, “Corporate Powers as Powers in Trust” (1931) 44 Harv L Rev 240 E Merrick Dodd, “For Whom are Corporate Managers Trustees?” (1932) 45 Harv L Rev 1145 at 1148 241 Adolf Berle, “For Whom Corporate Managers Are Trustees: A Note” (1932) Harv L Rev 1365. 242 Adolf Berle, The 20th Century Capitalist Revolution (1954) at 169. 243 David Millon, “Berle and Dodd: Why Are We Still Talking about This?” (2010) 33 Seattle University LR 889.    69  (imagined or existing) dichotomy between the two sides.244  Some scholars have put forth the proposition that Berle and Dodd were ultimately concerned with different issues.245 It seems common for Berle to inaccurately be labelled as an advocate of shareholder wealth maximization at the expense of all else.246 But Berle, who has also been labelled as “progressive” by some scholars,247 was perhaps focused on ensuring a meaningful alternative to the shareholder primacy model was available before he could in good conscience lend his support. His later works indicate his interest in containing the pervasive levels of power that could be effectuated through the corporate institution, rather than protecting the profit-maximizing function of the model.248 Berle believed that “a power vacuum is always filled by a power holder” and thus, for Berle, the issue at hand was really about ensuring that those in power were properly and effectively regulated.249 In his writings and predictions, Berle could not have known how accurately his perceptions of power would have played out decades                                                  244 See e.g. Fenner Stewart, “Better Socializing Corporate Governance: The Berle and Dodd Debate 75 Years Later” Paper presented at the annual meeting of The Law and Society Association, Berlin, Germany (25 July 2007), online: All Academic Research <>. Lynn Stout put it well by stating how after reading contemporary works on these issues, “one might be tempted to throw up one’s hands and conclude that academics have not lent much more insight into this question since the original Berle-Dodd debate.” Lynn A Stout, “Bad and Not-So-Bad Arguments for Shareholder Primacy” (2002) 75 S Cal L Rev 1189 at 1190. 245 See Millon, supra note 243 (pointing to public policy controversies generated by the hostile takeover boom of the 1980s as the true origins of the current debate). Others have suggested that that they ultimately shared the same viewpoint. See e.g. Fenner, supra note 244.  246 See Bratton & Wachter, supra note 75 (highlighting this common error). 247 See e.g. Lorraine Talbot, “Enumerating Old Themes? Berle the Progressive” (2010) 33 Seattle University LR 889; William Bratton, “Berle and Means Reconsidered at the Century’s Turn” (2001) 26 J Corp L 3; Bratton & Wachter, supra note 75. 248 Berle, supra note 88 at 19. Interestingly, Berle has reflected upon how he felt The Modern Corporation “in no way broke new ground.” For Berle, pointing out that corporations increasingly held large concentrations of power was not a new realization and he queried as to why the book had been received in the academic community as novel. He felt that he had been “describing a phenomenon with which everyone was familiar” and still thought this to be the case. Ibid. at 19–20.  249 Berle extended his theories on power in Adolf Berle, Power (1969), in which he describes the sources and limits of four manifestations of power: economic, political, judicial, and international.   70  later, as the combination of ineffective regulation, human frailty, the derivatives revolution, and amplified power were all key American factors contributing to the GFC.250  In the decades following the Berle-Dodd debate, various alternative theoretical models and approaches emerged in an attempt to highlight and counteract the problems associated with the modern corporation’s focus on shareholder wealth maximization. These works generally consider how to improve and potentially redesign the corporate institution so that it “can assure that power is deployed in the service of individual and societal flourishing rather than against it.”251 This section explores some prevalent counter-hegemonic discourses of the last few decades, while recognizing that there are several additional alternative approaches and models available in scholarship that may or may not overlap with those described below.252  2.1.1 Stakeholder Theory and CSR Since the Berle-Dodd exchange, the shareholder versus stakeholder debate in corporate law “has proven most fundamental and enduring.”253 The core question has been whether shareholder primacy should be invoked in all circumstances: “Does the firm exist only to increase shareholder wealth? Or, should managers also seek to serve the interests of employees,                                                  250 Cristie Ford, “New Governance in the Teeth of Human Frailty: Lessons from Financial Regulation” (2010) Wisc L Rev 101. 251 Testy, supra note 22 at 1228. 252 Examples include systems theory or enterprise corporatism (George Teubner, “Enterprise Corporatism: New Industrial Policy and the ‘Essence’ of the Legal Person” (1988) American J of Comp L 36) and the communitarian approach (David Millon, “Communitarianism in Corporate Law: Foundations and Law Reform Strategies” in Lawrence Mitchell, ed, Progressive Corporate Law: New Perspectives on Law, Culture and Society (Westview Press, 1995)). 253 Lynn A Stout, “New Thinking on ‘Shareholder Primacy’” (2012) 2 Journal of Accounting, Economics, and Law – A Convivium (AEL) 1 at 2.   71  creditors, customers, and the broader society?”254  Business models specifically addressing stakeholder interests in for-profit corporations became prominent in the mid-1980s.255 The motivation behind stakeholder management was to build a framework that would respond to the concerns of managers experiencing a business environment “buffeted by unprecedented levels of environmental turbulence and change.” 256 A stakeholder approach sought to broaden the concept of strategic management beyond its traditional economic origins. The definition of stakeholder included “any group or individual who is affected by or can affect the achievement of an organization’s objectives,” thus including any person or entity that simply could assist in or benefit from a corporation’s success.257 As well, corporate legal scholars have gone on to define the term stakeholder perhaps more broadly, as “any individual or group on which the activities of the company have an impact,” implying stakeholders include those that have been affected by any and all corporate actions, not just those that have been for the achievement of the organization’s objectives.258  Stakeholder theory encouraged management to develop business strategies that invest in all stakeholder relationships that will help to ensure its long-term success. The theory places                                                  254 Stout, supra note 244 at 1190. 255 R Edward Freeman & John McVea, “A Stakeholder Approach to Strategic Management” in Michael A Hitt, R Edward Freeman & Jeffrey S Harrison, eds, The Blackwell Handbook for Strategic Management (Oxford: Blackwell Publishers Ltd, 2006) at chapter 6, para 3 (describing how its origins may have come from the Stanford Research Institute, now SRI International, in the 1960s).  256 Freeman & McVea, supra note 255 at 189. 257 R Edward Freeman, Strategic Management: A Stakeholder Approach (Cambridge: Cambridge University Press, 2010) at 46. 258 Christine Mallin, Corporate Governance (Oxford: Oxford University Press, 2004) at 43. See Jean Jacques du Plessis, James McConvill & Mirko Bagaric, Principles of Contemporary Corporate Governance (New York: Cambridge University Press, 2005) at 16-28, for further detail on the definition of “stakeholder.”    72  critical importance on developing an understanding of the actual stakeholders specific to the institution in question as, through this level of understanding, management can create strategies supported by all stakeholders to ensure the long-term survival of the institution. R. Edward Freeman and John McVea suggest that as the business world becomes increasingly tumultuous and interconnected, and “as the boundaries between firms, industries and our public and private lives become blurred, a stakeholder approach has more and more to tell us about both values and value creation.”259 The central task in the stakeholder approach to strategic management is “to manage and integrate the relationships and interests of shareholders, employees, customers, suppliers, communities and other groups in a way that ensures the long-term success of the firm.”260  While the notion of stakeholder interests may have roots in a number of academic fields, much of the theoretical development behind stakeholder theory has been credited to work from Freeman and others at the Wharton School of Business at the University of Pennsylvania. The theory has also had its application stretched into several interdisciplinary fields such as corporate law, feminist ethics, and philosophy, among others. The “wide-ranging intuitive appeal” and avid adoption by several schools of thought led some of the early developers of the theory to decry “distortions” in its interpretation, with later works attempting to address the exact scope of the theory in response to both “explicit and implicit” criticism.261 Proponents suggest that stakeholder theory “can reasonably remain agnostic” with regard to whether any changes the                                                  259  Freeman & McVea, supra note 255 at 189. 260 Ibid. at 192.  261 Robert Phillips, R Edward Freeman & Andrew C Wicks, “What Stakeholder Theory is Not” (2000) 13:4 Bus Ethics Q 479.    73  governance model are required for it to work effectively.262 The theory does not rule out the possibility, or even advantage, of having stakeholder representation on boards, for example, but these sorts of efforts “[are] not theoretically necessary or intrinsic to stakeholder theory per se.”263 Recognizing that the topic of stakeholder legislation “may be the knottiest log we herein hew,”264 they insist that while discourse concerning the legal relationship between the corporation and its stakeholders is welcome, stakeholder theory does not require changes in the law to remain viable. It is important to note that stakeholder theory tends to assume that managing firms in the interest of multiple stakeholders is indisputably better than managing in the best interests of shareholders only, but this presumes that the long-term survival of firms is also beneficial to society as a whole. However, it is important to consider instances where under the long-term success of a firm there is one long-term firm survivor which may not be socially beneficial. Jan Bena points out the example of a precious asset that could be very productive in delivering large gains to social welfare but is owned by a firm that is inefficiently managed, so these gains to the society are not realized. The firm might be managed well enough that it is not in fear of bankruptcy, and thus the precious asset is conserved in this unproductive use. Here, the long-term survival of the firm does not benefit society as a whole, and bankruptcies may be regarded as good things if such procedures allow those assets to be freed up and put to better use for the society in other organizations. Thus the application of stakeholder theory is limited in that its focus is rests solely on improving the survival of the firm and not necessarily the betterment of                                                  262 Ibid at 491. 263 Ibid.  264 Ibid.   74  society.265 Despite its neutral position in improving social and environmental problems, stakeholder theory as a management approach is better at incorporatinfg environmental interests, and has become closely linked to the rapid development of CSR in recent decades. Contemporary CSR itself has become intimately intertwined with the “green” movement, and its growth has been evident on a global scale.266 Despite the vast and ever-increasing body of literature on CSR, the prospect of defining CSR is not an easy one. In fact, there has been much work produced in academic scholarship that has specifically addressed the difficulties in determining the parameters of CSR.267 Prakash Sethi commented that “the phrase ‘corporate social responsibility’ has been used in so many different contexts that it has lost all meaning.”268 Dirk Matten and Jeremy Moon explain: First…CSR is an ‘essentially contested concept’ being ‘appraisive’ (or, considered as valued); ‘internally complex’; and having relatively open rules of application. Secondly, CSR is an umbrella term overlapping with some, and being synonymous with other, conceptions of business-society relations. Thirdly, it has clearly been a dynamic phenomenon.269 Freeman et al have noted that “[a]fter more than half a century of research and debate, there is not a single widely accepted definition of CSR,” and provides a panoply of the numerous “ideas, concepts, and practical techniques” generated from CSR research, including corporate                                                  265 Thank you to Professor Jan Bena for this point.    266 See e.g. Douglas Branson, “Corporate Social Responsibility Redux” (2002) 76 Tulane L Rev 1207 (providing a historical summary of the CSR movement).  267 See e.g. Andrew Crane et al, eds, The Oxford Handbook of Corporate Social Responsibility (Oxford: Oxford University Press, 2008); Dirk Matten & Jeremy Moon, “‘Implicit’ and ‘Explicit’ CSR: A Conceptual Framework for a Comparative Understanding of Corporate Social Responsibility” (2007) 33 Academy of Mgmt Rev 2 at 3. 268 Prakash Sethi, “Dimensions of Corporate Social Performance: An Analytical Framework for Measurement and Analysis,” 17:3 California Management Rev at 58. 269 Ibid.    75  social performance270; corporate social responsiveness271; corporate citizenship272; corporate governance273; corporate accountability274; sustainability, triple bottom line275; and corporate social entrepreneurship276; among others.277  Ultimately, “[t]heories of corporate social responsibility cast a potentially broader net, emphasizing all of the social costs of corporate activity, and therefore embrace, for example, environmental or political concerns as well as stakeholder interests.”278 Scholars have pointed out that in the past several years “an array of stakeholders have turned to firms, rather than governments, to address enduring environmental problems including forest degradation, fisheries                                                  270 AB Carroll, “A Three-Dimensional Conceptual Model of Corporate Social Performance,” 4 (1979) Academy of Mgmt Rev 497; Steven L Wartick & Philip L Cochran, “The Evolution of Corporate Social Performance,” (1985) 10 Academy of Mgmt Rev 758; Donna J Wood, “Corporate Social Performance Revisited (1991) 16 Academy of Mgmt Rev 691. 271 Robert Ackerman, The Social Challenge to Business (Cambridge: Harvard University Press, 1975); Robert Ackerman & Raymond Bauer, eds, Corporate Social Responsiveness: The Modern Dilemma (Virginia: Reston Publishing Co, 1976); Sethi, supra note 268. 272 DJ Wood & JM Logsdon, “Theorising Business Citizenship,” in J Andriof & M McIntosh, eds, Perspectives on Corporate Citizenship (Sheffield: Greenleaf, 2001); S Waddock, “Parallel Universes: Companies, Academics and the Progress of Corporate Citizenship,” (2004) 109 Business and Society Review 5. 273 TM Jones, “Corporate Social Responsibility, Revisited, Redefined,” (1980) 22(3) California Management Rev 59; R Edward Freeman, “Corporate Governance: A Stakeholder Interpretation,” (1990) 19 J of Behavioral Econ 337; William M Evan & R Edward Freeman, “A Stakeholder Theory of the Modern Corporation: A Kantian Analysis,” in Ethical Theory and Business, 4th ed, Tom L Beauchamp & Norman E Bowie, eds, (New Jersey: Prentice Hall, 1993). 274 Simon Zadek, Peter Pruzan & Richard Evans, Building Corporate Accountability: Emerging Practice in Social and Ethical Accounting, Auditing and Reporting (UK: Routledge, 1997). 275 John Elkington, “Towards the Sustainable Corporation: Win-Win-Win Business Strategies for Sustainable Development” (1994) 36 California Management Rev 90. 276 James Austin, Howard Stevenson, and Jane Wei-Skillern, “Social and Commercial Entrepreneurship: Same, Different, or Both?” (2006) 30 Entrepreneurship Theory and Practice 1. 277 R. Edward Freeman, Jeffery Harrison, Andrew C. Wicks, Bidhan L. Parmar, Simone de Colle, Stakeholder Theory: The State of the Art (Cambridge: Cambridge University Press, 2010) at 235. 278 David Millon, “Communitarians, Contractarians, and the Crisis in Corporate Law” (1993) 50 Wash. and Lee L. Rev. 1373 at 1002.   76  depletion, mining destruction, and even climate change.”279 CSR has been readily adopted by environmental activists and supporters to take advantage of the enormous and integral role corporations play in the sustainable management of environment resources. Matten and Moon contend that at the heart of CSR is the notion that it “reflects the social imperatives and the social consequences of business success.”280 Branson notes that one example of its staying power “may be the appearance in the legal periodicals of a steady stream of crossover articles dealing with environmental subjects and corporate responsibility.”281 Heal, for example, has taken his economic analysis of corporate social responsibility and how firms “internaliz[e] external costs, with a view to reducing the potential for conflict between themselves and other groups in society” through an environmental lens.282 Branson views the green movement as having three components: green advertising, green product manufacture and competition, and green management.283 He notes that green advertising is driven, at times, by consumer preference rather than any strong corporate social responsibility mission.284 Green product introductions and green product competition form a bridge between green advertising and green management. Green management is a broader topic, including “protection of the biosphere, sustainable use of natural resources, reduction and                                                  279 Graeme Auld, Steven Bernstein, & Benjamin Cashore, “The New Corporate Social Responsibility” (2008) 33 Annu. Rev. Environ. Resour. 413 at 416. 280 Matter & Moon, supra note 267 at 3. 281 Branson, ‘Redux,’ supra note 266 at 1225. 282 Geoffrey Heal, “Corporate Environmentalism: Doing Well by Being Green” (August 2007), online: Social Science Research Network <>. 283 Branson, ‘Redux,’ supra note 266 at 1222-1225. 284 Ibid.    77  disposal of waste, wise uses of energy,” while management is seen to have specific environmental responsibilities.285 Green management can range from observance of environmental standards to actual subscription of private initiatives such as CERES Principles, which were created in 1989 following the Exxon Valdez crisis by the Coalition for Environmentally Responsible Economies, to provide broad environmental standards for evaluating corporate activity with the intention of helping organizations set environmentally sound business practices.286 The recent increased visibility of SRI dedicated to environmental sustainability287 and green investing in the capital markets (discussed further in Section below), has resulted in many open-ended questions regarding the proper governance and regulation of these products going forward288 and may also suggest progress toward new modes of good governance. The period when CSR only referred to corporate philanthropic donations has passed, and the vast majority of scholars generally seem to agree that CSR on a whole, even as a confusing and disorganized movement, is a good thing. Branson has noted that the movement is “converging with, rather than diverging from, broader trends in corporate governance.”289 Few, if any, have challenged the theoretical merits behind the green movement and its important contributions to environmental sustainability. Indeed, it is important not to prematurely equate                                                  285 Ibid. 286 CERES, “CERES Principles” (as of July 2010), online: CERES <>. 287 See e.g. Wesley Cragg & Ben Richardson, “Being Virtuous and Prosperous: SRI’s Conflicting Goals” (2009), online: Social Science Research Network <>.  288 See e.g. Cragg & Richardson, supra note 287 (stating that “[t]o keep ethical investment ethical will likely require institutionalizing new norms and governance standards, in such domains as reforming fiduciary duties and the internal governance of financial organizations”); Heal, supra note 282 at 8-14. 289 Ibid.   78  shareholder primacy to unfriendly social and environmental practices. Some scholars, for example, have supported increased shareholder democracy, pointing to examples where shareholders have advocated for sustainable reporting and other measures that have improved corporate actions, and certainly the SRI movement is a prime example of this practice.290  Nevertheless, empirical studies have shown that CSR trends have been consistent with theories of strategic CSR and rational, profit-seeking management decision-making.291 ‘Greenwashing’ – where companies spend significantly more time and money on green advertising than on environmentally sound practices – is a real concern. The pure economic incentives driving CSR mean sustainable practices automatically lose out when those practices are not good for the financial bottom line. There are legitimate concerns that CSR may just become another commodity that businesses sell in the service of short-term shareholder wealth maximization, rather than act as a catalyst toward substantive change. While trends show that SRI is growing more relevant, studies indicate that the practice will not be reaching mainstream any time soon.292 Only 23% of total assets under management (AUM) by institutional investors are from intrinsic investment strategies – such as low turnover, concentrated holdings, and pursuit of long-term value creation – as compared to the vast majority which use momentum or mechanical index strategies.293 These and several other factors make the pressure on companies                                                  290 See e.g. Janis Sarra,“Shareholders as Winners or Losers under the Amended Canada Business Corporations Act” (2003) 39 Can Bus LJ 52.  291 See e.g. Donald Siegel & Donald Vitaliano, “An Empirical Analysis of the Strategic Use of Corporate Social Responsibility” (2007) 16 Journal of Economic and Management Strategy 773; Ronald Fisman, Geoffrey Heal and Vinay Nair, “A Model of Corporate Philanthropy” (2007) Columbia Business School Working Paper, online: <>. 292 Pricewaterhousecoopers, “Do Investors Care about Sustainability?” online: <>.  293 Dominic Barton & Mark Wiseman, “Focusing Capital on the Long Term” (January-February 2014) Harvard Business Review. Note that many studies assume ownership by institutional investors following passive investment strategies, such as mechanical index strategies, are not conducive to long-term value creation, but there are   79  to meet their quarterly earnings targets extremely intense. One study surveyed hundreds of CFOs and found that 55% of them indicated they would forego an attractive capital investment project today if the investment led them to even marginally miss their quarterly earnings targets.294 Market forces essentially compel a company to look mainly at increasing share value, and short-term outlooks can easily overpower long term visions of sustainability when a company’s shares are trading on the global capital markets. It should be noted that sustainable practices are not the antithesis of shareholder primacy, they simply generate from financial motivations that at times overlap with sustainability and at other times do not. The issue, then, is whether it is sufficient to have shareholders act as the centrepiece of corporate interests with sustainability as a potential by-product. Stakeholder theory and CSR do shift away from concepts deemed to be inherent in shareholder primacy, but proponents from both fields who are motivated to pursue stakeholder-oriented management for the ultimate purpose of increasing shareholder wealth implies a strong adherence to the status quo. While both have been deemed effective in lessening some of the negative externalities from the private sector, thus far neither has proven to be a successful change agent to the shareholder primacy model, nor have proponents suggested they should be.                                                                                                                                                              counterarguments to this assumption. Passive investment strategies mean that the institutional investor cannot buy a firm’s stock and sell it shortly after, for example after a short-term gain has been realized. Instead, such investment strategy allows the investor to sell a firm’s stock only if the firm is removed from the index. Since equity purchases and sales are basically exogenously prescribed to passive investors, the only way the investors can increase their returns is to engage with firms’ management to make them pursue long-term value creating strategies. This is in stark contrast to popular views. See e.g. Jan Bena et al, “Are Foreign Investors Locusts? The Long-Term Effects of Foreign Institutional Ownership, European Corporate Governance Institute (ECGI) – Finance Working Paper No. 468/2016. 294 John R. Graham, Campbell R. Harvey & Shiva Rajgopal, “Value Destruction and Financial Reporting Decisions” (2006) 62 Financial Analysts Journal 27 (noting that 55% of CFOs would forego attractive capital investment project today if it meant even marginally missing quarterly targets).   80 Codified CSR: United Kingdom’s Enlightened Shareholder Value In 2006, the United Kingdom enacted the Companies Act295 which introduced the concept of “enlightened shareholder value” (ESV) to their for-profit corporate model.296 The core principle behind ESV is embodied in Section 172 of the Companies Act, which defines the fiduciary duties of directors as follows:  A director [must act] in good faith . . . to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to . . . (a) the likely consequences of any decision in the long term, (b) the interest of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.297  ESV recognizes the idea that corporations should pursue shareholder wealth with a long run orientation that seeks sustainable growth and profits based on responsible attention to the full range of relevant stakeholder interests. Similar to stakeholder-based approaches, ESV strives to expand beyond the short-term focus of increasing share price, particularly when such focus has the ability to produce negative effects for other stakeholders. Management’s ultimate responsibility still lies with shareholders, but it is required to pursue that objective through the stakeholder parameters outlined in the statute.  American scholars have pointed to ESV an “emerging third way” in the classic                                                  295 Companies Act (2006), C. 46. For the legislative history of UK reforms, see generally, Gordon Clark & Eric Knight, “Implications of the UK Companies Act 2006 for Institutional Investors and the Market for Corporate Social Responsibility” (2009) 11 U Pa J Bus & Employment L 1. 296 Ibid. As one scholar pointed out, “American corporate law scholars and policy makers have not infrequently drawn inspiration from regulatory innovations in the United Kingdom.” Virginia Harper Ho “‘Enlightened Shareholder Value: Corporate Governance Beyond the Shareholder-Stakeholder Divide” (2010) 36 J Corp L 59. 297 Companies Act, supra note 307 at s. 172.   81  shareholder v. stakeholder debate.298 Beyond the specific mandate of Section 172, Cynthia Williams and John Conley have described ESV as a broader conceptual transformation in the UK that explicitly shifts the focus of corporations to longer term interests of extended stakeholder constituencies. Millon also sees ESV as serving as both a legal and normative approach to management that can significantly alter core tenets of the shareholder primacy model.299 By broadening the range of interests attended to by ma