Adjudicating ESG Reputation

Some economic theories of the corporation predict that permitting corporate managers to consider stakeholder interests or other nonfinancial values in corporate governance raises agency costsAgency costs (Sadie Blanchard) 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 costsAgency costs (Sadie Blanchard) are controlled through judicial, market, and shareholder-democratic orders. Judicial ordering is usually viewed as encompassing strictly legal enforcement—an alternative to the reputationReputation (Sadie Blanchard)-based private orderingPrivate ordering (Sadie Blanchard) that happens through markets and shareholder voting. But courts can also powerfully enhance reputational private orderingPrivate ordering (Sadie Blanchard) 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 reputationReputation (Sadie Blanchard)-based governance regime suggests that adjudicationAdjudication (Sadie Blanchard) holds greater promise than is currently appreciated for controlling the agency costsAgency costs (Sadie Blanchard) arising from the pursuit of nonfinancial goals. The chapter briefly sketches several possibilities. Future research should explore how to design legal and private orderingPrivate ordering (Sadie Blanchard) institutions that better harness the reputational governance power of adjudicationAdjudication (Sadie Blanchard) to enable shareholders to cooperate in pursuing their nonfinancial goals through the corporate form.