How Stakeholder Theory Undermines the Principle of Law

Whenever I talked regarding markets, poverty and wealth, I make one point that invariably disturbs pupils: if you want to know why some nations have successfully transitioned out of widespread poverty to material affluence, and others have not, the rule of law is a lot more significant than democracy.
Section of the stunned response flows from the fact that the term”democracy” functions now as a synonym for everything nice and lovely. After, however, we get past the inevitable”Are you saying that you are against flames!?!” Protestations, followed by my promise that I prefer liberal constitutionalism suspended in natural law assumptions (quite a few pupils pick up on the nuance), the more the students realize that although things like universal suffrage have their own worth, they have little to do with economic growth per se. Additionally, as pupils grasp the meaning of rule of law, so they gradually recognize how nations with similar starting points in terms of demographics, natural resources, geography, religion, society, etc., may wind up in very different economic places.
Rule of law’s centrality to free, just, and economically prosperous societies is the topic of Nadia E. Nedzel’s The Rule of Law, Economic Development, and Corporate Governance (2020). Broadly speaking, one would be the Anglo-American conception of”rule of law” This, Nedzel says, concerns”equal treatment under the law, limited government, the jury trial, separation of powers, established judicial procedure, and problem solving by way of inductive, analogical reasoning to ascertain what decision would be consistent with earlier habit.” The other is that the continental European tradition of exactly what she calls”rule through law”–rechtsstaat. While it has many of the identical institutional attributes, rule through law”emphasizes community and equality over liberty, and posits that regulations should avoid conflict, not merely manage it”
Nedzel proceeds to illustrate the different ways in which these methods form economic life generally and, more especially, the lawful treatment of corporations. That previous thing, Nedzel demonstrates, has immediate consequences for a set of thoughts that she thinks has great potential to undercut the roots of Western prosperity. This concerns stakeholder concept: the promise that any firm has a responsibility to all those who conceivably have a stake in the business–workers, customers, local communities, suppliers, the environment, previous and future generations, etc.–besides those that actually own or have invested capital in the company.
In Nedzel’s perspective, if stakeholder concept becomes cemented into Western legal systems, the damage to companies and market savings will be considerable. Resisting that tendency, she suggests, needs those nations forged from the Anglo-American rule of law tradition to hold fast rather than adopt stakeholder concepts of the purpose of company presently being advanced in civil law jurisdictions.
Common v. Civil
Nedzel is a renowned scholar of comparative law who instructs in Louisiana. Her attention issues as Louisiana is the only authority in the USA where personal law was heavily shaped by the legacies of Spanish and French colonial authorized codes. These impacts have been overlaid with much more distinctly common law thoughts and state laws. But the Spanish and French background signifies that Louisianan judges, attorneys, and law academics are especially attuned to the part of European civil law rules and how they differ from common law enforcement.
This is definitely true in Nedzel’s case, but she nutritional supplements this understanding of current arrangements with significant historical appreciation of how ordinary law and civil law systems emerged over many centuries. That is the attention of Nedzel’s opening chapters.
When coupled with the effect of figures such as Sir Edward Coke, average law’s bottom-up emphasis on tradition, custom and expertise developed to a predilection for both individualism and limited government. This differed greatly by the sort of legal systems that became dominant during continental Europe. Rather different forces have been in the office in these nations.
Amongst others, these include a revived attention to Roman law; the increase of political absolutism; the influence of Cartesian doctrine; Rousseauian General Will theories; the French Revolution; the subsequent implementation of the Code NapolĂ©on from France and other nations; and also the evolution of somewhat authoritarian conceptions of rechtsstaat where the only constraint upon the state was exactly what it took to impose on itself. The end-result was legal codes where a sort of hard-communitarianism, as opposed to”the Rights of Englishmen” stressed from the Anglo-American planet, became the interpretive frame deployed by people exercising legal and political jurisdiction.
An American Legal Conflict
The Anglo-American and continental European conventions have not been in isolation from one another. There’s absolutely not any lack of judges or legal philosophers who listen to changes in other authorities. Nedzel exemplifies that, as time passes, there are many different and often successful attempts to import rechtsstaat-like notions into America via law schools, laws, and judicial rulings.
She portrays Hart’s job as playing a significant role in advancing what amounted to a social democratic notion of government and law. Yet despite such resistance, many of Hart’s thoughts entered America’s political and legal bloodstream. This occurred precisely as a ton of progressive legislation was flowing from Washington D.C. and many state capitols.
That has many consequences, however, her attention is determined by the implications for economic growth. Her argument, which isn’t a new person, is that those countries closer to the Anglo-American rule of law tradition generally outperform in economical conditions those nations who have adopted other lawful avenues.
An emphasis on stability and preserving levels of employment, for instance, exacts a price in terms of organizational dynamism, not least by Favorable risk-taking and entrepreneurship.The correlation and causation involving rule of law and purposeful economic growth isn’t hard to show. Nedzel draws upon the research of economists like Hernando de Soto and the overdue Svetozar”Steve” Pejovich to exemplify the point. It is, nevertheless, at this juncture which Nedzel’s main target looms into view. Her emptiness (and herein lies her novel’s most first part) is that stakeholder concept reinforces continental European rule through law inclinations and also vice-versa, not least because of shared hard-communitarian foundations.
In Whose Interests?
In accordance with Nedzel, corporate law in common law jurisdictions is extremely different from that present in civil law states. The gaps don’t, she worries, flow from dissimilar challenges. Business problems (and company malfeasance) tend to have universal attributes. Rather she considers the ways in which corporate regulation in the us currently retains a shareholder focus accompanied by soft law provisions that encourage sound business leadership and direction, often through industry standards and rules of conduct.
This contrasts greatly with civil law authorities. The weight given to hard-communitarian concerns, Nedzel retains, translates to heavy-handed small business regulation from the country. In most European nations, this extends up to mandating chairs on boards of directors for representatives of banks, authorities, and company staff (invariably marriage officials).
Such aims undermine the ability of corporations to produce prosperity. An emphasis on stability and preserving levels of occupation, for instance, exacts a price in terms of organizational dynamism, not least by discouraging risk-taking and entrepreneurship. These habits definitely upset established structures and routines of behavior within companies and generate change and frequently rapid turnover in markets. With no adjustments, though, a company will get complacent and uncompetitive. Finally it will vanish, along with all the jobs once supplied by the enterprise. Similarly, if boards of directors aren’t focused on delivering customer value since profit is considered just one of many company objectives, a decline in earnings is guaranteed to follow.
These principles help explain the poorer economic performance of many corporations in civil law jurisdictions in contrast to those companies located primarily in the Anglo-American sphere. Corporate law in Anglo-American systems is not without its own problems. But Nedzel maintains the (present) shareholder focus will help incentivize the innovation and flexibility that’s vital to creating the wealth that rewards investors but also, albeit unwittingly, millions of people who have never possessed a share in their own lives.
Herein lies Nedzel’s core difficulty with all the flirtation with stakeholder concept by most American companies and corporations. At the moment, much of the romance is rhetorical and, as it seems, primarily a public relations exercise designed to support the awakened and various left-leaning groups. What the writer dreads (logically ) is that nations such as America, Britain, and Australia will begin drifting down the path of many civil law jurisdictions that have started mandating stakeholder-oriented ideas via national legislation and European Union directives. Not only will this ease considerable liability and transparency problems by effectively making boards of directors liable to many stakeholders; it will also, Nedzel builds, result in diminished economic functioning in those nations which have hitherto adhered to Anglo-American rule of regulation expectations.
Neither a person focus nor stakeholder concept, Nedzel warns, will eliminate corporate wrongdoing. Provided that humans are individual, some folks will act badly in company. To the extent that stakeholder concept brings upon hard-communitarian principles that it shares continental European rule through law units, it risks undermining fragile commitments to rule of law in the us and elsewhere. That’s one more reason to shore up the verge of shareholder interests during corporate America. For once rule of law will be gone, the path to its recovery is a long and difficult one really.