Faculty Seminar | Corporate Purpose and Financialization

Neeraj Grover, Assistant Professor at NLSIU, will present a paper titled “Corporate Purpose and Financialization”. Dr. Sudhanshu Kumar will be the discussant.

Abstract

This draft section is part of the larger project that maps the legal structure, design, and nature of the corporations against the backdrop of recently enhanced global convergence towards corporate social responsibility (“CSR”). The project questions if corporations thwart their social responsibility by design, and whether such design is a consequence of corporate law as it emerges from the fundamental jurisprudence of contracts and property.

In this section, the focus is on financialization. Financialization (or financialism) is a process that has changed the landscape of shareholders who are the most critical of the corporate stakeholders. It generally refers to the “increasingly important role of financial markets, motives, actors and institutions in the operation of the economy”.(Fligstein N. and Goldstein A.2015). At the level of the corporation and its shareholders, this manifests in the orientation of equity markets towards share value maximisation as its primary goal. In a legal design still path dependent on favouring shareholders at the cost of CSR, financialization appears to resist true corporate responsibility by reinforcing shareholder power and control over companies.

With the emergence of larger institutional investors who invest across borders, it is also understood as a symptom of wealth concentration in the financial markets. This accumulation of shareholder wealth amongst fewer but larger institutional investors, who are interested in their corporations in ways different from retail investors, also homogenises shareholders as a group. Here, I ask whether financialization has been aided by corporate law, eventually requiring the ‘fix’ of stricter CSR mandates (especially in India) to make corporations socially responsible. To answer, I place four elements from the relevant legal theory and legislation on spot: (a) consecutive and incremental dominance of the protection of shareholders as the primary agenda of corporate finance law; (b) classic corporate law literature that pitted company directors against shareholders, and accordingly espoused the reduction of agency costs between “managers” and “shareholders” as the primary conundrum of corporate governance, (c) homogenisation of shareholders as a class in corporate law literature, leading to a self-fulfilling prophecy of all shareholders interested in share value maximisation, (d) new ESG regime that links CSR with enhanced share value. [Note: for this version, I focus only on the last element, that is (d).]

The section is structured as follows: Part 1 describes financialization and explores how it restricts true CSR; Parts 2 deals with law’s role in enabling financialization, and sub-parts (a), (b), (c), and (d) each elaborate on how the four respective elements aforementioned reinforce financialization; Part 3 then concludes and connects this chapter with possible threads in progressive corporate law literature that might be useful in examining legal approaches that have the effect of restricting financialization. This includes debates around the legal duties of company directors.