A reflection on “stop fossil subsidies” – and the urgent need for reform of corporate law

We need structural legal reform

A month ago, in those now distant weeks of an unexpected Indian summer, I was travelling back from a welcome visit to the beach. I was in high spirits after having spend most of the summer indoors in a desperate yet ultimately successful attempt to finish my dissertation. I had left Scheveningen and was now well on my way home on the A12. The protests had cleared but their strong calls to action remained in the pink slogans painted on the outer walls: “stop fossil subsidies.”

Whilst passing them (admittedly on a fossil-fueled motor bike), I was reminded of a line written almost 120 years ago by the German sociologist Max Weber: “This modern economic order is now bound to the technical and economic conditions of machine production – which today determine the lives of all the individuals who are born into this mechanism. Perhaps it will so determine them until the last ton of fossilized coal is burnt. Fate decreed that the cloak should become an iron cage.”

Whilst riding on, I thought: the lives of all the individuals born into this mechanism – that’s us. And particularly: that’s the young people who most likely painted these urgent calls to “stop fossil subsidies”. Suddenly, it struck me how confronting it is that we are still debating the legitimacy of subsidies for fossil fuels, knowing what we know and seeing what we see. While mounting scientific – and frankly by now also experiential – evidence indicates the need to stop and transform our economic order, we are still debating whether or not to take our foot off the gas pedal. The gloomy thought entered my mind that this great-great-grandparent of ours might actually be right: perhaps it will indeed determine us until the last ton of fossilized coal is burnt.

In the weeks after this bleak reflection on that late summer afternoon, I kept returning to those words. They consolidated in me the feeling that the challenge of our time really is one of structure rather than behaviour. The challenge of integrating the needs of our environment in the functioning of our global economy is not just about changing individual consumption patterns or about adopting different public policies. It’s about structurally reforming the legal system which sustains the direction of our global economic order. Without such structural reform, we remain determined by what Weber so captivatingly (pun intended) called an iron cage – regardless of our good intentions.

Okay, so why corporate law?

Whilst such structural reform calls for changes in many fields of law, I have come to believe that without the reform of corporate law Weber’s iron cage will remain. It is particularly corporate law which determines the internal direction and orientation of corporations and sustains their focus on economic growth. Without changes to this internal direction, our global economic order will remain driven towards growth – despite external efforts to slow it down. Allow me to explain.

Essentially corporate law defines the internal governance structure and direction of corporations. For Dutch corporations, this means a large responsibility and autonomy for corporate boards (both executive and supervisory) to pursue the durable success of their corporation and its enterprise – defined as “long-term value creation”. This legal autonomy of the board is counterbalanced by extensive internal governance rights for shareholders to determine key aspects of the corporation, including the discharge and appointment of board members. Importantly, Dutch corporate law allows shareholders to exercise these rights in pursuit of their own partial interests – creating an internal tension with the responsibility of the board to pursue the interest of the corporation as a whole. Such tension may prove fateful particularly for social and ecological strategies in the situation of a hostile take-over attempt in the global market for corporate control. Examples abound in which courageous boards have had to capitulate their social and ecological strategies in the face of hostile investors threatening to use their legal rights to push the board back towards a short-term profit-driven trajectory.

On top of these formal bodies of corporate governance, Dutch corporate law allocates some governance rights to employees through the works council. Though important for the practical dynamic of corporate governance, these rights of the works council are a lot less extensive than those allocated to shareholders and hence sustain the dominant position of shareholders in corporate governance. While in practice much is changing – Dutch institutional investors are increasingly adopting stewardship responsibilities and the Dutch Corporate Governance Code outlines various best practices oriented towards sustainability and social inclusion – the binding governance structure of Dutch corporate law remains heavily tilted towards an autonomous board with a powerful meeting of shareholders.

Dutch corporate law therefore sustains the internal direction of corporations towards economic value creation and shareholder interests. Meanwhile, unwanted forms of corporate activity are left to be corrected through external regulation, such as the EU Taxonomy Regulation, or by imposing liability for environmental harm, for example in the case of Shell. While important, this approach seems to constitute a perverse dynamic of encouraging corporations to speed up (through corporate law) while expecting them to slow down at the same time (through other fields of law). Perhaps this is not going to work?

In sum, the legal governance structure defined by Dutch corporate law might well determine the lives of all those born into it until the last ton of fossilized coal is burnt. An important implication of this is that it’s not – as is often presumed – necessarily the actors in corporate governance (particularly board members and investors) who are at fault. Instead, the problem lies with the legal structure of corporate governance itself. Without reform of corporate law, corporations remain the profit-driven, shareholder-oriented engines of growth which they are designed to be by corporate law. Structural change is therefore needed. And since legal corporations are amongst our most ingenious inventions (as Harari aptly put it in his book Sapiens), we can also re-invent them. Our hope, therefore, rests in the reform of corporate law.

How should we approach such reform?

Dutch corporate law largely developed in a dialectic between two perspectives of the corporation: viewing the corporation either as a market partnership or as a legal institution. Often operating under affiliated banners – such as “shareholder versus stakeholder capitalism” or “Anglo-American versus Rhineland models of corporate governance” – these perspectives continue to dominate the debate about corporate reform. Whilst the partnership perspective emphasizes market-based interventions such as shareholder stewardship and external liability, the institutional perspective relies on law-based interventions such as binding rules of stakeholder governance and extensive regulation. Both therefore offer valuable avenues for reform. At the same time something seems missing. Something perhaps so obvious that we have forgotten to see it – like the parable of the fish who did not know about the water.

In my understanding, there has in the background always been a third perspective in Dutch corporate law: viewing the corporation as a real entity operating in society through the factual operations of its enterprise. Instead of viewing corporations as something conduced in office buildings by market investors or lawmakers, corporations are real and can be found in the factual circumstances in which they operate. According to this perspective, the task for corporate law is simply to recognize these factual circumstances and offer a legal framework capable of regulating the corporation as it operates and self-emerges. The content of corporate law should not be based on hypothetical market contracts or on a fictional license to operate conceded by government, but rather should follow from the actual operations of real people with real assets in a real social and ecological environment.

By revitalizing this third perspective, insights from the climate sciences about the interdependent relationship between corporations and their environment can be introduced in Dutch corporate law. By looking directly at the corporate enterprise as it operates, insights from complex systems theory can be used to understand the corporation as an ecosystem embedded in larger social and ecological ecosystems. By focusing on this environmental embeddedness, the inevitable relationship between the success of the corporation and the sustenance of the ecosystems on which it depends can be integrated in Dutch corporate law. For this purpose, other notions from climate sciences could be useful such as the notion of “ecosystem services” (used by the IPCC), “planetary boundaries” (developed by the Stockholm Resilience Center) or “resilience” as the capacity of ecosystems to adapt and sustain themselves in the face of change. By leveraging such notions, the third perspective can introduce a more scientific understanding of corporations in Dutch corporate law and overcome the misalignment between corporate operations and the needs and limits of their environment.

On top of these more empirical insights, I think that this third perspective allows for an introduction of normative insights from communitarian philosophies. Such community-based approaches to normativity link the empirical fact of being embedded in a community to a normative responsibility for preserving that community. By viewing the legal corporation as an ecosystem embedded in larger ecosystems, such normative responsibility to preserve these larger ecosystems can be adopted in Dutch corporate law. Meanwhile, the rich language associated with such community-based philosophies can be used to refine and unpack these responsibilities. For example, the notion of conscience can help to develop an internal capacity for corporations to assess the normative impact of their operations on their environment. Such development of a corporate conscience can be complemented by the aspirational language of environmental virtues to articulate the preferred normative attitude for corporations towards environmental problems (such as virtues of temperance, prudence, and care).

Altogether, I think that this third perspective suggests ecosystem stewardship as a more integrated form of corporate governance. Such ecosystem stewardship relies on a combination of scientific methods from climate sciences as well as normative notions such as an internal corporate conscience and environmental virtues. By grounding corporate governance directly in the factual circumstances of the corporate enterprise, the notion of ecosystem stewardship allows for a better understanding of the interdependent embeddedness of corporations in larger ecosystems as well as the normative implications of this direct relationship. Rather than relying on external market incentives or legal compliance, corporations can be equipped with an internal capacity to integrate the needs and limits of their environment directly in their governance.

Revitalizing this third perspective therefore allows for an integrated and wholesome approach to reform of Dutch corporate law. Instead of replacing the historically dominant perspectives of the corporation as a market partnership and legal institution, I suggest complementing them with this third perspective. By synthesizing insights from all three of them, we can articulate more integrated and wholesome proposals for reform.

Alright, so what should be reformed?

Based on this integrated approach, I suggest five specific changes for the reform of Dutch corporate law. The aim of these changes should be to transform the internal direction of corporations from a focus on economic growth and shareholder interests towards a broader focus on the larger needs and limits of their social and ecological environment.

1. The corporate legal notion of “durable success” should be defined in terms of its larger environment through a fact-based corporate purpose. Such individual purpose should refer to the specific problems facing the corporation and its environment (preventing hollow marketing slogans). Profitability as well as the needs and limits of involved ecosystems should be viewed as the boundary conditions within which this purpose is pursued.
2. The legal responsibility of the executive board should be to steward the corporate ecosystem as a self-organizing whole. Their ecosystem stewardship should be oriented towards building the resilience of both the corporate ecosystem itself as well as the larger ecosystems in which it is embedded (similar to the notion of “double materiality” in the EU CSRD).
3. The supervisory board should be legally designed as the internal forum for conscientious reflection. This role as an internal corporate conscience involves a legal responsibility to review the normative implications of corporate operations on their environment. To this end, the supervisory board should be legally equipped with an extensive mandate to engage with the complex reality of its corporate ecosystem – and be required to include relevant experts capable of representing involved social and ecological interests (such as scientists or representatives of civil society).
4. Shareholders should be legally required to exercise their governance rights in pursuit of the shared definition of corporate success. While shareholders should remain free to trade their shares in accordance with their own interests, they should exercise the power affiliated with those shares in service of the interest of the corporation as a whole. As a consequence, a binding form of shareholder stewardship would prevent the threat of a hostile take-over in the global market for corporate control at the expense of social and ecological strategies. Instead, all shareholders (both existing and new) would be bound to the shared definition of success, with respect for the limits and needs of involved ecosystems.
5. Stakeholders (including local stakeholders and civil society organizations) should be included in corporate governance through a binding responsibility for boards to establish a stakeholder policy and through affiliated engagement rights for stakeholders. In situations of severe mismanagement, stakeholders should have legal access to a public court. More extensive forms of stakeholder inclusion, including localized forms of stakeholder governance, should be facilitated by corporate law – but left to the discretion of corporations themselves. All stakeholder engagement should be oriented towards the shared definition of success in a spirit of collaborative learning (similar to shareholders).

By adopting (forms of these) five changes in corporate law (both here and abroad), I think we could transform our global economic order into a regenerative economy which is aligned with the needs and limits of our social and ecological environment. As such, these changes may help us to truly escape from Weber’s iron cage and prevent the gloomy prospect it suggests. I am hopeful that we can.