205 Establishing boundaries: narrow, broad or dynamic?

In corporate legal theory, each perspective provides its own approach to determine the boundaries of corporate governance, thereby impacting the way in which social and ecological aspects enter the board’s decision-making process. According to the partnership perspective, the boundaries of corporate governance are mainly determined by the need for efficient value creation, resulting in narrow boundaries oriented towards sustaining the continued and competitive performance of the corporation in a market environment.1 Social and ecological aspects become relevant for corporate governance only in relation to the strategic need of the corporate enterprise to achieve efficient value creation.2 Supply chain due diligence is therefore mainly considered from the point of view of the instrumental and strategic interest of the corporation itself rather than taking a larger view of respecting external interests or the integrity of its environment on non-strategic grounds.

By contrast, the institutional perspective proposes a broader set of boundaries for corporate governance, including non-strategic interests through the allocation of binding legal duties and the internal representation of stakeholders.3 Consequently, social and ecological aspects become relevant for boards based on moral and legal grounds rather than a strictly strategic need to achieve continued performance. The boundaries of corporate governance become oriented towards principles of fairness, rather than being oriented merely towards strategic efficiency. The downside of an institutionalized approach is the potential creation of a sharp distinction between those stakeholders that are included in such binding rules and those that are omitted.4 Particularly those social and ecological interests which are hard to identify in advance and cannot be represented by human stakeholder groups are vulnerable to being left outside of the institutional boundaries of corporate governance. While the institutional perspective may accommodate duties to include those non-identifiable and non-representable interests, the legal nature of the institutional perspective does not by itself offer an approach to determine the boundaries of such inclusion. Similar to the systemic nature of systemic risks, supply chain due diligence requires a systemic understanding of the corporation to explain the interdependent relationship between the corporate enterprise and its environment. The ecosystem perspective may be better equipped to provide such a systemic understanding, complementing the institutional approach similar to the inclusion of systemic risks.

According to the ecosystem perspective, the boundaries of corporate governance emerge from two opposite poles.5 On the one hand, the creative agency of the corporate enterprise reaches outward and includes aspects of its environment in its own corporate ecosystem. This outward-reaching movement resembles the approach of the partnership perspective, considering the strategic interests of the enterprise to be the focal point of analysis for the boundaries of corporate governance. On the other hand, the existential embeddedness of the enterprise in its environment results in the larger dynamic of social and ecological ecosystems encroaching upon the corporate enterprise and imposing their needs and limits on corporate governance. In my understanding, the central principle governing this dynamic between agency and embeddedness is resilience.6 Such resilience includes both the resilience of the corporate enterprise to adapt to environmental changes as well as the resilience of the larger environment to continue flourishing and providing its ecosystem services on which the corporation and others depend.

By thus perceiving the boundaries of corporate governance from two opposing poles, social and ecological interests become relevant for corporate due diligence by reference to the systemic interdependence between the enterprise and its environment. The boundaries of due diligence should include those social and ecological aspects which are necessary for maintaining the resilience of the corporate ecosystem itself as well as the resilience of the larger ecosystems in which the corporation is embedded.7 Using supply chains as the focal point of analysis for due diligence seems to be a suitable approach to achieve this, since supply chains imply the full cycle of social and natural resources used by a corporation in its process of value creation. By understanding supply chains as this larger ecosystem of the corporation, all relationships between the corporation and its environment fall within the realm of supply chain due diligence. As a result, the boundaries of supply chain due diligence coincide with the dynamic boundaries of the corporate ecosystem in between the outward-reaching movement of its enterprise and the inward-reaching movement of its larger environment.