Adjudicating ESG Reputation
Document Type
Book Chapter
Publication Date
2024
Abstract
From the Publisher
Some economic theories of the corporation predict that permitting corporate managers to consider stakeholder interests or other nonfinancial values in corporate governance raises agency costs in the relationship between managers and shareholders. However, a substantial subset of shareholders want the corporations they invest in to be able to credibly commit to protecting those nonfinancial interests and values, for instrumental or non-instrumental reasons. This chapter reconceptualizes the key mechanisms of corporate governance as working together as a reputational ordering regime. It argues that a different way of looking at what courts generally do suggests possibilities for what they—or other adjudicative institutions—could do here to bond corporate commitments to serve shareholders’ non-financial values. Managerial agency costs are controlled through judicial, market, and shareholder-democratic orders. Judicial ordering is usually viewed as encompassing strictly legal enforcement—an alternative to the reputation-based private ordering that happens through markets and shareholder voting. But courts can also powerfully enhance reputational private ordering by producing credible information about managers’ behaviour that shareholders can use when trading and voting. Further, the ex ante common knowledge of the availability of information production through courts exerts governing power over managers’ behaviour. Recognising that all three of the key mechanisms of corporate governance already function together as part of a reputation-based governance regime suggests that adjudication holds greater promise than is currently appreciated for controlling the agency costs arising from the pursuit of nonfinancial goals. The chapter briefly sketches several possibilities. Future research should explore how to design legal and private ordering institutions that better harness the reputational governance power of adjudication to enable shareholders to cooperate in pursuing their nonfinancial goals through the corporate form.
Series: Economic Analysis of Law in European Legal Scholarship (EALELS, volume 19)
Recommended Citation
Blanchard, Sadie, "Adjudicating ESG Reputation" (2024). Book Chapters. 128.
https://scholarship.law.nd.edu/book_chapters/128
Publication Information
in Law and Economics of Corporate Governance: Shareholders, Stakeholders, and Beyond 149 (Klaus Mathis & Avishalom Tor eds., 2024)