185 Formal inclusion and checks-and-balances.

In relation to the inclusion of social and ecological interests, the main challenge faced by the institutional perspective relates to the legitimacy and accountability of boards when interfering in their social and ecological environment. By establishing the board as the autonomous decision-maker with final responsibility in corporate governance, the institutional perspective invites possible forms of corporate despotism in which boards receive power over social and ecological interests without sufficient public accountability mechanisms.1 A closer look at theories resembling the institutional perspective shows that an institutional approach to corporate governance offers various remedies to overcome this challenge. Since the institutional perspective considers corporations to be constituted by binding legal rules, the central approach would be to redesign the corporate governance structure imposed on corporations by Dutch corporate law.2 Such legal reform would allow for general duties to be imposed on corporate boards requiring that they include social and ecological interests in their decision-making, for example by serving a binding, overarching societal purpose.3 Additionally, the obligatory publication of an annual report by the board could be extended to include information on the social and ecological performance of the corporation, as exemplified by the legal development of imposing standards of integrated reporting through corporate law.4

However, this kind of low-hanging fruit of corporate reform invite more difficult questions about their further implications for the inclusion of social and ecological stakeholders in corporate governance and the rights and duties of other bodies of corporate governance, particularly the supervisory board and the general meeting of shareholders. After all, boards can only be expected to fulfil additional duties in relation to social and ecological interests if they are embedded in a broader corporate governance framework supporting those duties.5 For example, do shareholders have a duty to support a board strategy oriented towards social and ecological objectives, also if such a strategy conflicts with their own interests?6 To what extent should other stakeholders have legal rights to challenge a board strategy if it fails to integrate their interests?7 According to which standards should boards be expected to judge those potentially conflicting interests?8 What role does the supervisory board have in all of this?9 And if its role should change, then what would the implications be for its composition and capacities?10 Due to the dominance of the institutional perspective in contemporary Dutch corporate law, these questions resemble the issues that I identified in relation to the current legal position of the board in relation to social and ecological interests.

In my assessment, the theories resembling the institutional perspective provide multiple opportunities for overcoming these issues. Moreover, I want to stress here that these questions also provide room for integrating suggestions made by the other two perspectives. Considering the institutional perspective as the starting point for legal reform, both due to its influence in current Dutch corporate law as well as its theoretical capacity to provide a legal ground structure for such reform, I argue that these suggestions may prove to be valuable complements to the opportunities offered by the institutional perspective. I will return to this potential for a complementary synthesis below.11 At this point, I will first discuss the opportunities offered by the institutional perspective itself to overcome the lack of legitimacy and accountability of the board. In the previous chapters I have considered in detail the various arguments for reform that fit within the approach of the institutional perspective. Here I will provide a brief summary of those proposals.

The first opportunity for legal reform would be through the internal representation of social and ecological stakeholders in corporate governance. As a result of the legal approach of the institutional perspective, corporate governance becomes bureaucratic in nature characterized by a formal system of rules governing the process of decision-making.12 This formal system of decision-making particularly includes an internal separation of powers and the rights of consultation for stakeholders.13 These bureaucratic characteristics embody important process values such as the fidelity of corporate officials to assigned responsibilities, accountability towards the institution and its stakeholders, consultation with stakeholders, and the mitigation of arbitrariness through self-restrained, rule-governed decisions.14 Ultimately, the formalization of such process values enables the elimination of arbitrariness, providing opportunities for reasoned argument, ensuring a reliable determination of the facts, and upholding the stability of decisions.15 As a consequence of the rule-based, bureaucratic nature of institutional corporate governance, social and ecological interests can be formally included in the structure of corporate governance.

Such formal inclusion could be achieved through the internal representation of stakeholders in corporate governance. In general, such internal representation would involve the allocation of specific governance rights to stakeholders, particularly the right to receive information, the right to provide advice on decisions and the right to vote on or even to veto certain decisions.16 The operationalization of such an allocation of rights could take various forms.17 A first form would be the implementation of a representative stakeholder democracy, in which all stakeholders have the right to collectively appoint and review board members similar to a representative government.18 A less far-reaching form would be the engagement of stakeholders through obligatory stakeholder councils or forums, for example in an annual stakeholder meeting.19 A final and less radical form of stakeholder governance would be through imposing a legal duty on boards to establish a stakeholder policy, including a legal definition of what such a stakeholder policy should consist of.20 I do not intend to argue that all these forms should be implemented. Rather, I argue that the institutional perspective provides promising methods for solving some of the challenges related to the inclusion of social and ecological interests in corporate governance. The actual implementation of these opportunities requires further consideration, including the potential need for tailoring them to the specific circumstances of a given corporation. I will return to this in the next sections when discussing solutions for the issues identified in Dutch corporate law.21

Another opportunity for legal reform within the institutional perspective would be through an extension of the internal system of checks and balances to include social and ecological interests. Drawing on the analogy between corporate governance and public government, a key approach of the institutional perspective to board accountability is an internal separation of powers established through a formal system of checks and balances.22 The general separation would be between the strategy-making authority of the executive board and the internal monitoring and evaluation of these strategies by other bodies of corporate governance, such as the supervisory board, the works council or the shareholders meeting.23 Such an existing separation of powers could be extended by implementing a two-chamber type of corporate governance structure in which the board answers to an internal parliament of stakeholders with rights to challenge board decisions before the courts, particularly before the Dutch Enterprise Chamber.24 Another approach to extending the internal system of checks and balances would be through regulating the composition and election of the executive and supervisory boards, for example by appointing state representatives or experts from civil society to the supervisory board.25 All these suggestions acknowledge the political nature of corporate decisions, without requiring the corporation to become governed by partisan forms of democratic government.26 As a result, the autonomous strategy-making authority of the board would be respected while the exercise of its authority in relation to social and ecological interests would be subjected to regulated procedures and a system of checks and balances. Through such a constitutionalization of power, the risk of corporate boards becoming too autonomous might be overcome without disabling corporations from being competitive in a global market environment.27