202 Prevention of harm versus preservation of resilience.

In Dutch corporate legal theory, the underlying consensus between the three perspectives is that corporations should not cause involuntary harm to external stakeholders, including the social and ecological environment. However, each perspective provides its own arguments for this, which impacts the standards according to which boards should manage systemic risks.

By focusing on the contractual freedom of individual partners to join or exit the corporate partnership, the partnership perspective views involuntary harm to stakeholders as an infringement of the individual freedom of each stakeholder to assert and negotiate its interests in relation to the corporation.1 By definition, involuntary harm burdens stakeholders without consent and as a result externalizes the negative costs of the corporation from the negotiation of the market mechanism. Involuntary harm should therefore be prevented in order for the market mechanism to coordinate the distribution of the costs and benefits of corporate cooperation. A key legal approach for the partnership perspective to prevent involuntary harm is through general liability law, which would internalize the costs of harm in the price mechanism of the market.2 This includes a general legal duty to prevent disproportionate endangerment (gevaarzetting) but may also involve allocating unlimited liability to shareholders, as suggested by Hansmann and Kraakman.3 In my understanding, such an approach based on liability law is faced with two main limits in relation to corporations posing systemic risks to their social and ecological environment. First, relying on liability law suggests that the focus should be on the materialization of systemic risks into actual harm instead of the intrinsic danger of creating systemic risks themselves. The materialization of systemic risks, such as the collapse of a natural ecosystem, involves an accumulation of various factors, often involving multiple actors beyond a single corporation. This makes attributing liability for the materialization of systemic risks to an individual corporation difficult due to the lack of linear causation.4 Second, liability law presumes that involuntary harm caused to stakeholders by the materialization of systemic risks can be compensated by restitutionary damages. However, involuntary harm to the social and ecological environment often cannot be reversed through restitutionary damages, such as the irreversible loss of biodiversity due to the collapse of a natural ecosystem. The management of systemic risks through liability law is not a watertight approach and leaves social and ecological interests at risk of being exposed to irreversible harm. Although liability law functions as an important remedy of last resort to compensate for involuntary harm caused by corporations to their environment, other approaches seem to be necessary to integrate systemic risks in corporate decision-making.

The institutional perspective equally includes a general duty for corporations to prevent harm to society and the natural environment. Instead of relying on the corrective mechanism of liability law, the institutional perspective relies on explicit legal duties or binding regulation to align corporate governance with public interests.5 The responsibility of the board to monitor and manage systemic risks becomes an explicit legal duty itself without the need to consider their materialization into actual harm. The benefit of this approach is that boards are required to ex ante integrate systemic risks into their decision-making, without the need to rely on ex post correction by liability law. Meanwhile, the nature of systemic risks involves a systemic understanding of the relationship between corporations and their environment which differs from the approach of the institutional perspective. By constituting the corporation in a legal concession provided by society and its stakeholders, the institutional perspective as I interpret it focuses on the legal nature of the corporation as an institution constituted by binding legal rules rather than its systemic embeddedness in larger social and ecological ecosystems. Although this legal approach may accommodate a systemic understanding of corporations, it does not necessarily provide notions or insights to explain and regulate the standards according to which boards should determine the legitimate level of systemic risk caused by their corporation to its environment. In my view, the ecosystem perspective may be better equipped to provide those notions, thereby complementing the legal approach of the institutional perspective.

The language of systemic risks comes naturally when adopting an ecosystem perspective. By viewing corporations as complex systems embedded in larger ecosystems, the ecosystem perspective highlights the systemic interdependence between corporate activities and the dynamic of their social and ecological environment.6 The scientific approach of the ecosystem perspective introduces the understanding of systemic tipping points into corporate governance, suggesting that ecosystems may reach a point of disequilibrium beyond which the ecosystem transitions into a trajectory towards a different, potentially less flourishing state.7 The notion of systemic risks captures this potential of individual corporate activities contributing to a change of equilibrium in its larger ecosystem. For example, the IPCC uses the notion of systemic risks in its reports to assess the capacity of natural ecosystems to continue to provide the ecosystem services on which human life depends.8

In order for boards to determine the level of systemic risk they are allowed to take, the ecosystem perspective suggests resilience as the general standard for corporate governance to strive for. Such resilience entails both the resilience of the corporate ecosystem to adapt to changes in its environment and continue providing its products and services to society, as well as the resilience of the larger ecosystem to maintain its state of dynamic equilibrium.9 Corporate governance is perceived as operating in this tension between the individual agency of its corporate enterprise and the existential embeddedness of its enterprise in the larger dynamic of its environment. By thus focusing on the resilience of corporate ecosystems and their environment, corporate boards become perceived as ecosystem stewards which are required to navigate this tension between agency and embeddedness and to find interventions which serve both the continued performance of their enterprise and their larger environment.10