Legitimating Corporate Power

This paper draws on political theory to make sense of the perennial debate between those who believe that corporations exist to maximise shareholder value (“shareholderists”) and those who think that corporations serve a broader societal purpose and should therefore answer to a more diverse gallery of stakeholders (“stakeholderists”). The main premise is that shareholderists and stakeholderists, despite their pervasive differences, appear to agree on one crucial issue: The modern corporation and the legal system that governs it suffer from a legitimacy deficit. Even the most prominent critics of stakeholder theory admit that the profit seeking operations of large corporations “contribute to a wide array of society’s problems and impose serious negative externalities on employees, communities, consumers, and the environment.” (Bebchuck and Tallarita, 2022)

The paper argues that there are two complementary but fundamentally different ways to legitimise corporate power. As with democratic institutions, the legitimacy of a large corporation may derive from its inputs or outputs. In political science, such two-sided concept of legitimacy has been used to distinguish between governing effectively for the people (output legitimacy) and enabling political participation by the people (input legitimacy) (Scharpf 1970, 1999). In terms of input legitimacy, corporate decisions would be legitimate only if those who are affected by them can participate in the decision-making process and have a reasonable chance to scrutinize the results. Output legitimacy, in contrast, requires meeting a substantive, outcome-oriented criterion: corporate power is legitimate if it effectively promotes common welfare.

The paper contributes to the ongoing corporate purpose debate in two different ways: First, by focusing our attention to the debate’s normative foundations, the concept of input/output legitimacy clarifies and structures the disagreement, which entails a complex mix of politics, economics, and ethics. Second, the concept aids in analysing the nature and effect of the on-going sustainable corporate governance reforms. It is argued that recent initiatives, such as the European Union’s corporate sustainability due diligence (CSDDD) proposal, bite primarily in the input legitimacy dimension, by enhancing procedures that strengthen stakeholder participation and deliberation in corporate decision-making. This emphasis doubtlessly matches the preferences of large global corporations that have spent more than a decade developing corresponding legitimation strategies. Meanwhile, the much anticipated “legal version of the stakeholder model” (Donaldson and Preston 1995) that would make corporate leaders accountable to more diverse interests, also in in terms of their decisions’ impacts, has made little progress.

Speaker: Dr Heikki Marjosola, associate professor of law, University of Helsinki

Dr Heikki Marjosola is Associate Professor of Law at University of Helsinki. His current research interests relate to corporate governance, digital finance, securities law, and regulatory governance of the EU financial markets. His recent publications include Digital Finance in Europe: Law, Regulation, Governance, a special volume of the European Company and Financial Law Review (De Gruyter, 2022) which he co-edited together with Professor Emilios Avgouleas. Previously, he held a position of assistant professor of law at the London School of Economics and Political Science. Before his academic career, Heikki worked as a capital markets and M&A lawyer in a Helsinki-based law firm. He regularly acts as an independent advisor in legal matters relating to banking and finance as well as EU law. Heikki is a member of the Finnish Takeover Board.