10.1 Introduction
How do the corporate laws of developing countries differ from those of their developed counterparts? A common view is that the corporate laws of Global South jurisdictions – like their private laws more generally – are either (i) outdated, (ii) failed transplants of modern foreign laws, or (iii) plagued by severe challenges of enforcement.Footnote 1 An even more extreme view, building on the former, is that corporate laws in developing countries are so ineffective that they are not worth studying, given that extralegal factors dominate.Footnote 2 While these views reflect more than a kernel of truth in numerous contexts, they offer an incomplete and impoverished perspective of corporate laws in the developing world. Rather than being inevitably antiquated or blind copies of Global North models, emerging economies have pioneered distinct stakeholder approaches to corporate laws. I call these approaches “heterodox stakeholderism” as they are different and often bolder than the longstanding strategies of corporate law to protect non-shareholder constituencies in the Global North.Footnote 3
Preceding the “rise of ESG”Footnote 4 and the renaissance of a stakeholder focus on corporate law in the Global North, core developing jurisdictions such as Brazil, India, and South Africa had embraced novel, and often more aggressive, legal strategies to protect stakeholder interests.Footnote 5 In the last decades, Brazil has largely eliminated shareholders’ limited liability for the benefit of stakeholders, such as workers, consumers, and victims of environmental harm. Before interest in ESG exploded in the Global North, Indonesia and India mandated corporate social responsibility, and India and South Africa required dedicated committees in charge of social responsibility. While legal reforms seeking to advance diversity in corporate governance date back to the last two decades in the Global North, Malaysia has boldly pursued affirmative action in corporate ownership for the benefit of the Malays since the 1970s, while South Africa has pushed for greater Black ownership and empowerment in corporate governance through its laws on Broad-Based Black Economic Empowerment (B-BBEE) since 2003. South Africa has also innovated by expanding workers’ ability to enforce directors’ duties under the Companies Act of 2008 and has been hailed as a “global leader in sustainable corporate governance.”Footnote 6
Taken together, these developments offer a different picture of corporate governance developments around the world. Although Global South constitutional law and courts have achieved significant recognition and notoriety in the literature on comparative constitutional law for their distinct approaches to enforcing social rights,Footnote 7 developing countries’ heterodoxies in corporate law – be they regarded as promising innovations or pernicious developments – have been largely neglected. The comparative literature on corporate law remains dominated by North–North comparison,Footnote 8 individual country studies of developing economies,Footnote 9 regional studies,Footnote 10 and works focusing on the common–civil law divide.Footnote 11 The growing literature on China often embraces Chinese exceptionalism and fails to place China within a continuum of heterodox stakeholderism in developing countries.Footnote 12 Studies that incorporate a broader set of developed and developing economies often do not engage in North–South comparisons.Footnote 13
Including a broader array of Global South jurisdictions in comparative corporate governance produces distinct intellectual and policy payoffs. First, it helps overcome existing shortcomings in our understanding of global developments. One is the “World Series” syndrome in the comparative literature, understood as the pretense that insights from a select group of “usual suspects” from the developed world are representative of global developments.Footnote 14 Another problem is the “odd duck” syndrome: because Global South jurisdictions are often examined in single-country studies, this can easily produce misleading diagnoses of exceptionalism. For instance, commentators have described India’s approach to enterprise liability as “unique” and “revolutionary” from a comparative perspective, without recognizing that Brazil and other emerging economies are part of a similar trend.Footnote 15
Second, appreciating common approaches to corporate law in developing countries generates insights into how background economic and social conditions may influence corporate law strategies. Heterodox stakeholderism in corporate law can be viewed as an institutional adaptation to environments of high inequality and insufficient state capacity to curb externalities and promote social welfare through other areas of law. This is the flip side of the implicit “modularity approach” that has traditionally dominated law-and-economics analysis.Footnote 16 Under a modular approach premised on compartmentalization and functional specialization, each area of law should contribute to social welfare by focusing on one economic problem: for corporate law, the standard single objective is the reduction of agency costs associated with the corporate form.Footnote 17 However, if other areas of law (such as tax, environmental, and antitrust laws) fail in accomplishing their objectives, the case for such a modular approach – which may not be optimal to begin withFootnote 18 – falters accordingly.
This heterodox or “social turn” in the Global South is not unique to corporate law.Footnote 19 Previous work has shown how certain developing jurisdictions, such as Brazil, South Africa, and Colombia, have incorporated concerns about inequality in contract law more strongly and explicitly than their counterparts in the Global North.Footnote 20 Similarly, a common claim in comparative constitutional law is that, because of larger socioeconomic gaps and lower state capacity in the Global South, “constitutional courts in these countries will be more inclined to intervene on behalf of the poor, or to support the constitutional recognition and progressive realization of social and economic rights”Footnote 21 – an argument that mirrors our account of heterodox stakeholderism in corporate law.
Problems of state capacity to curb externalities and address inequality help explain both the rise of heterodox stakeholderism in corporate laws in the Global South and the resurgence of stakeholder approaches in the Global North and on a global scale in recent years. The ESG agenda emerged from an effort of the United Nations to recruit corporations and investors at the turn of the twenty-first century to fight the regulatory gaps left by globalization, which threatened the legitimacy of global capitalism by permitting human rights abuses and environmental degradation.Footnote 22 The financial crisis of 2008, for its part, cracked the US hyper-modular law-and-economics consensus that a legal regime fostering shareholder wealth maximization is always socially optimal. In the aftermath of the crisis, a new academic consensus emerged that systemic risk externalities and the difficulties in regulating financial institutions require a distinct corporate governance model designed to mitigate risk from within.Footnote 23
While the initial anti-modular diagnosis was limited to financial institutions,Footnote 24 it did not take long for this mode of reasoning to expand in calling for the internalization of other forms of risks and externalities, such as climate change risk and social harms.Footnote 25 Interestingly, the current crisis of the modularity approach is by no means unique to corporate law in the Global North, but is also observed in other areas of law.Footnote 26 Recent challenges to the modularity approach in other areas of law include the growing incorporation of concerns about democracy, workers’ welfare, and climate change in antitrust, and climate change in financial regulation.Footnote 27 From this perspective, the increasingly welfarist, nonmodular trend in the Global North can be interpreted as a surprising and unpredicted form of “reverse convergence” in corporate law as in other areas of law, with economic and social crises – and the urgency of necessary solutions – bringing the Global North closer to the Global South in various respects.
Beyond the failure of other areas of law in addressing externalities and inequality, heterodox stakeholderism in the Global South also responds to interjurisdictional externalities and distributive implications along North–South lines. By focusing on aggregate efficiency or social welfare, comparative corporate governance has neglected the importance of geopolitical boundaries and how they affect interjurisdictional externalities and distribution.Footnote 28 At least some facets of heterodox stakeholderism respond precisely to such a national calculus. Commentators observed that the infamous Bhopal industrial disaster – a major leakage of toxic gas caused by a subsidiary of a multinational company – played a key role in pushing Indian courts to hold parent companies liable for ultrahazardous activities.Footnote 29 Foreign wrongdoers and local victims are a tough sell to local polities. Similarly, Argentina’s embrace of enterprise liability in the bankruptcy context in the 1970s favored local creditors at the expense of foreign parent company debtors.Footnote 30
This phenomenon highlights the importance of nationalism and North–South distribution in explaining variations in comparative corporate law. This is a familiar concept in other areas of law. For instance, it is well established in the field of international intellectual property law that strong patent protection tends to transfer wealth from developing to developed countries,Footnote 31 which means that the optimal level patent protection for Global South jurisdictions is lower than for Global North ones. The existence of heterodox stakeholderism suggests that a similar distributional dynamic is in play with respect to at least certain features of corporate law rules, such as limited liability for environmental and human rights disasters caused by corporate groups, thus making developing countries more likely to embrace heterodox forms of resistance.
This chapter’s description and analysis of heterodox stakeholderism in the Global South focuses on legal innovations in corporate law. Heterodoxy is defined as (i) distinct from the norm in the Global North in (ii) incorporating a broader set of public policy and distributional objectives in corporate law rules. I focus on six distinct manifestations of heterodox stakeholderism in corporate law and address each in a separate section: the erosion of limited liability for the benefit of stakeholders in Argentina, Colombia, India, and especially Brazil (Section 10.2); the adoption of mandatory corporate social responsibility (CSR) spending in India, Indonesia, and Mauritius (Section 10.3); the imposition of mandatory corporate social responsibility committees in India and South Africa (Section 10.4); workers’ right to enforce directors’ duties and to intervene in bankruptcy proceedings in South Africa (Section 10.5); and the pioneering efforts to deracialize economic power by increasing ethnic diversity in corporate governance in Malaysia and South Africa (Section 10.6). The chapter then concludes by reflecting on how including Global South jurisdictions in comparative corporate governance expands our institutional imagination and enriches our understanding of the driving forces behind the evolution of corporate law around the world.
10.2 The Erosion of Limited Liability to Protect Stakeholders in Brazil and beyond
The mitigation of limited liability offers another manifestation of heterodox stakeholderism in the Global South.Footnote 32 Limited liability is the most distinctive and celebrated attribute of the corporate form,Footnote 33 having been famously hailed as “the greatest single discovery of modern times.”Footnote 34 At the same time, shareholders’ limited liability gets in the way of the prevailing modularity approach to law and economics, according to which concerns about stakeholder protection should be addressed not by corporate law, but by other areas of law.Footnote 35 Limited liability clearly undermines the protection of stakeholders through tort law and regulations, making the corporation “the perfect externalizing machine.”Footnote 36
Mindful of these problems, law-and-economics scholars have long questioned the efficiency of shareholder limited liability vis-à-vis involuntary creditors, such as tort victims.Footnote 37 Even the fiercest opponents of veil piercing find that the case for limited liability is weaker in the context of tort liability in corporate groups.Footnote 38 Nevertheless, with some important exceptions,Footnote 39 progress toward overcoming limited liability for the benefit of involuntary creditors (such as tort victims) and non-adjusting creditors (such as workers and consumers)Footnote 40 has been glacial, if not completely stalled, in the Global North.Footnote 41 Contrary to law-and-economics prescriptions, US courts are less likely to pierce the corporate veil in tort cases compared to contract cases and in the parent–subsidiary setting compared to other contexts.Footnote 42 Katharina Pistor has recently decried how limited liability has let shareholders off the hook for harm caused to stakeholders in case after case.Footnote 43
Unbeknownst to most observers, the strongest challenges to limited liability as an obstacle to stakeholder protection have come from the Global South, particularly from Brazil. Brazil’s attack on limited liability vis-à-vis involuntary and non-adjusting creditors provides a particularly vivid example of innovative, if potentially problematic, approaches to stakeholder protection in the developing world. Brazil has effectively eliminated limited liability for compensation of harm to consumers, workers, and victims of environmental harm, as well as for directors, officers and controlling shareholders of failed financial institutions.Footnote 44 Interestingly, stakeholder-friendly veil piercing in Brazil is a fairly recent phenomenon dating to the last few decades, not a remnant of antiquated laws, indigenous tradition, or colonial history.
Just like in other jurisdictions, limited liability is a very traditional element of the corporate form in Brazil, recognized since its first corporations in the early nineteenth century and explicitly contemplated in all corporate statutes since the Commercial Code of 1850. If anything, Brazil historically offered stronger limited liability than other jurisdictions. US banks imposed “double liability” on shareholders between the Civil War and the Great Depression.Footnote 45 Brazilian banks, by contrast, enjoyed full limited liability during the same period.Footnote 46
The first significant encroachment to limited liability dates to Brazil’s Labor Law of 1943 (Consolidação das Leis do Trabalho – CLT), which imposed joint and several liability on all entities belonging to an “economic group” for debts to workers. Although exceptions to shareholder liability for the benefit of workers also exist in other jurisdictions,Footnote 47 the Brazilian regime in the Labor Law was, and still is, far-reaching from a comparative perspective in imposing strict joint and several liability on companies belonging to the same economic group. In 1987, a statute on financial institutions broke new ground by making individual controlling shareholders liable in cases of Central Bank intervention due to insolvency or wrongdoing in financial institutions.Footnote 48
Yet arguably the most important step toward Brazil’s strong challenge to limited liability in the stakeholder context was the enactment of the Consumer Protection Code of 1990 (Código de Defesa do Consumidor – CDC). The Consumer Protection Code grants judges the ability to pierce the corporate veil of an entity “whenever its personality is, in any way, an obstacle to the compensation of harm caused to consumers.”Footnote 49 Surprisingly, this expansive rule was absent from the draft bill proposed by consumerist advocates, but was included in the legislative process by politicians of center-right parties.Footnote 50 In fact, the very promulgation of this rule was likely a result of a historical accident.Footnote 51 Scholars have argued that the rule in question was supposed to have been vetoed by Brazil’s president, but the official veto message contained a typo and mentioned a different paragraph of the same article instead.Footnote 52 Nevertheless, courts ultimately ignored the scholarly denunciations of the typo and enforced the rule as written. The leading case imposing strict liability on shareholders for damages to consumers concerned a tragic explosion in a shopping mall, which killed numerous bystanders.Footnote 53
Despite its serendipitous origin, the innovative provision in the Consumer Protection Code – the first statutory rule on “disregard of legal entity” in Brazilian law – came to spread and influence stakeholder protections in other areas of law. Labor courts used it by analogy to render shareholders (including minority shareholders of close corporations) jointly and severally liable for unpaid dues to employees.Footnote 54 Moreover, Brazil’s environmental protection statute of 1998 adopts the same language used in the Consumer Protection Code to authorize piercing the corporate veil of an entity “whenever its personality is an obstacle to the compensation of harm caused to the quality of the environment.”Footnote 55
The erosion of limited liability in Brazil is such that scholars have decried the “end of limited liability” in the country.Footnote 56 Importantly, however, the attack on limited liability does not apply uniformly across areas of law but is concentrated in contexts of vulnerable stakeholders and difficult regulation. Brazilian economists have argued that the imposition of liability on controlling shareholders and managers of banks may be a more effective regulatory option given the well-known shortcomings of command-and-control regulations.Footnote 57 Brazilian courts are much more reluctant to overcome limited liability for the benefit of contract counterparties in commercial transactions, which are subject to the Civil Code’s restrictive provisions conditioning veil piercing on a finding of “commingling of assets” or “deviation of purpose.”Footnote 58
Since the 2010s, Brazil has witnessed several legal reforms seeking to constrain veil piercing. However, the various efforts are noteworthy for their limited scope in only restricting the most outlandish fact patterns. In 2015, a new Code of Civil Procedure created procedural safeguards for the application of veil piercing, by outlawing the then prevailing practice of attaching shareholders’ assets without their prior participation in the judicial process.Footnote 59 A 2019 statute called the “Law on Economic Freedom,” for its overtly libertarian bent, reformed the Civil Code’s section on veil piercing to include a new provision stating that “the asset autonomy of legal persons is a lawful interest of allocation and segregation of risks, established by statute with the aim of promoting enterprises, in view of the creation of jobs, tax payments, income and innovation for the benefit of all.”Footnote 60
Beyond the new rhetoric, however, the scope of the Civil Code’s reform is modest. The changes are limited to defining the meaning of “commingling of assets” and “deviation of purpose” that applies to civil and commercial transactions under the Civil Code, but do nothing with respect to the broad approaches to veil piercing in consumer, environmental, and employment law.Footnote 61 The Brazilian Congress passed a more ambitious bill aiming to impose numerous procedural constraints on veil piercing in 2022, but then President Jair Bolsonaro vetoed the proposed legislation in its entirety as unconstitutional and contrary to the public interest.Footnote 62 The President’s official veto message criticized, among other things, the proposed rule that would require plaintiffs to specify in the complaint the acts of shareholders that justified the piercing of the corporate veil.Footnote 63 It reasoned that such a change ran afoul of the strict regime in Brazil’s environmental and consumer protection legislation allowing for veil piercing regardless of fault, and would effectively impede the use of veil piercing in consumer disputes by shifting the burden of proof to the most vulnerable party.Footnote 64
Although Brazil’s experience is particularly broad and extreme, the country is by no means alone in embracing a more expansive approach to veil piercing to protect stakeholders in the Global South. In the last decades, India has mitigated limited liability in corporate groups by recognizing a doctrine of enterprise liability for the benefit of tort victims of hazardous activities.Footnote 65 In the wake of the much-publicized Bhopal disaster of 1984, in which the leakage of toxic gas from a Union Carbide pesticide plant took thousands of lives, Indian courts came to embrace enterprise liability and hold parent companies liable for tort victims of hazardous activities.Footnote 66 Departing from earlier precedents, the Indian Supreme Court embraced an absolute version of enterprise liability in the 1987 Mehta case resulting from an oleum gas leak in Delhi two years earlier.Footnote 67 The Court held that “[i]f the enterprise is permitted to carry on the hazardous or inherently dangerous activity for its profit, the law must presume that such permission is conditional on the enterprise absorbing the cost of any accident.”Footnote 68
The decision in Mehta contradicted the then dominant view about legal possibilities in developing countries. That year, Marc Galanter, one of the foremost scholars of law and development, had deplored the prevailing “legal torpor” in India following the Bhopal tragedy, denouncing the “absence of tort claims,” the “absence of tort doctrines,” and the “arid conceptualism” that prevented consideration of “problems of implementation or underlying policies.”Footnote 69 Nevertheless, “[t]he sense of violation by a foreign malefactor” raised new expectations of new kinds of claims and potential redress.Footnote 70
Indian courts then applied the new concept of enterprise liability for hazardous activities to the Bhopal case itself, after a US court declined jurisdiction on the grounds of forum non conveniens.Footnote 71 In 1988, the Madhya Pradesh High Court cited Mehta to recognize the liability of controlling shareholder Union Carbide for the harm caused in the Bhopal disaster by its Indian subsidiary.Footnote 72 The High Court rejected the parent company’s argument that it did not exercise control over its subsidiary, arguing instead that Indian law on limited liability and veil piercing had to adapt to modern economic conditions, such as “a mass disaster and in which on the face of it the assets of the alleged subsidiary company are utterly insufficient to meet the just claims of multitude of disaster victims.”Footnote 73 The Bhopal case was ultimately settled for US $470 million based on estimates that turned out to greatly underestimate the number of fatalities and victims – an outcome that is widely regarded as undercompensatory and unfair.Footnote 74
In 1996, the Indian Supreme Court once again reaffirmed its commitment to overcome limited liability within the corporate group for the benefit of stakeholders in dangerous industries.Footnote 75 In a case involving the release of toxic chemicals that devastated local agriculture, the Court held that “the enterprise … alone has the resource to discover and guard against hazards or dangers” and criticized what it viewed as “contempt for law and lawful authorities on the part of some among the emerging breed of entrepreneurs, taking advantage, as they do, of the country’s need for industrialization and export earnings.”Footnote 76 Interestingly, commentators – unaware of similar developments in other developing countries – have compared Indian law exclusively to the laws of Global North jurisdictions, and concluded that it is “unique” and “revolutionary” from a comparative perspective.Footnote 77
But India and Brazil are not the only countries in the Global South that have committed to overcome limited liability. In Colombia, shareholders of limited liability companies can be held liable for tax and labor obligations irrespective of fault.Footnote 78 Colombia’s bankruptcy law also makes parent companies presumptively liable for obligations of subsidiaries.Footnote 79 In a ground-breaking 2001 decision, the Colombian Constitutional Court held the controlling shareholders of a liquidated company temporarily liable for the company’s social security and pension liability.Footnote 80 The Court justified the exceptional measure as a response to the violation of the “fundamental right of protection of the vital minimum, of life in dignified conditions and of the protection of old age” concerning the liquidated company’s pensioners.Footnote 81 On that occasion, the Court for the first time boldly extended the effects of its decision to third parties, so as to guarantee the equal treatment of the company’s retired workers who did not take part in the lawsuit.Footnote 82
There are also prominent, though isolated, examples of attacks on limited liability in other Global South jurisdictions in cases that pitch the interests of foreign companies against local stakeholders. In the Deltec case of 1973, the Supreme Court of Argentina shocked the international community by finding a “unified socio-economic unit” and imposing liability on the Canadian parent company and other foreign affiliates for the debts of a bankrupt Argentine company.Footnote 83 Although the case concerned voluntary creditors, the legal challenge in question had been initiated by a small, likely non-adjusting, trade creditor.Footnote 84 The Court considered the “paramount interests of [Argentine] society” in relation to multinational enterprises,Footnote 85 and criticized the “excessive attachment to legal traditionalism” as one of the “most serious obstacles to the success of the promotion of economic expansion and social justice.”Footnote 86
10.3 Mandatory CSR Spending in India, Indonesia, and Mauritius
Since Adolf Berle and Merrick Dodd’s famous exchange in the 1930s, much of the debate on stakeholder protection has focused on the scope of directors’ fiduciary duties.Footnote 87 Both developed and developing jurisdictions have opted for corporate purpose provisions that mention broader interests beyond shareholders. While Brazil’s Corporations Law of 1976 grants an unusual amount of power to shareholders,Footnote 88 it requires directors and officers to act in the interest of the company, “subject to the public good and to the social function of enterprise,” and imposes liability on controlling shareholders for orienting a company toward a purpose “harmful to the national interest” or favoring another company to the detriment of the “national economy.”Footnote 89 India’s Companies Act of 1956 allowed shareholders to complain that the affairs of the company “are being conducted in a manner prejudicial to the public interest,”Footnote 90 with notions of public interest being “widely infused into company law.”Footnote 91 India’s more recent Companies Act of 2013 provides that directors “shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment,” while its Code of Conduct for independent directors requires them to “safeguard the interests of all stakeholders, particularly the minority shareholders,” and “balance the conflicting interest of the stakeholders.”Footnote 92
There are also manifestations of stakeholder-sensitive corporate purposes in the Global North, even though a bit blander. Under the UK Companies Act of 2006, directors must seek to promote the benefit “of its members as a whole, and in doing so [to] have regard (amongst other matters) to … the interests of the company’s employees, … [and] the impact of the company’s operations on the community and the environment.”Footnote 93 Similarly, a 2019 French law reform provides that companies must be managed in view of their corporate interest, while also considering the social and environmental issues arising from their activities.Footnote 94 Various US states contain constituency statutes permitting directors to consider the interests of employees, customers, the community, and even “the economy of the state and Nation.”Footnote 95 At the same time, one may interpret Delaware law’s greater focus on shareholders as beneficiaries of fiduciary duties as compensating for Delaware’s status as “the least shareholder-centric jurisdiction” from the perspective of the allocation of corporate powers.Footnote 96 In this sense, Delaware lies on the opposite side of the spectrum from Brazil, where stakeholder-oriented fiduciary duties coexist with exceptionally strong shareholder power. Yet, given the dearth of enforcement mechanisms, there is no evidence suggesting that broader fiduciary duties to stakeholders make much difference where they exist.Footnote 97 This section, and this chapter more generally, thus concentrates on distinct stakeholder-oriented innovations in the Global South, which, at least in theory, appear to have more teeth.
India’s Companies Act of 2013 attracted significant attention by introducing a requirement that large companies have a corporate social responsibility (CSR) policy providing for spending of at least 2 percent of profits on CSR.Footnote 98 Absent from the initial drafts of the proposed legislation, the CSR provision was inserted in the aftermath of the major Satyam scandal in 2009, which created the need to rebuild trust in corporate India.Footnote 99 In the parliamentary debate preceding the adoption of the bill, economic inequality was a key consideration. The Minister of the State for Corporate Affairs justified the provision as offering a much-needed “perception correction” at a time of “big division in this country,” as “the divide between the rich and the poor is getting bigger and bigger.”Footnote 100 The provision was also expected to minimize protest movements and buttress the popularity of the government’s pro-business policies.Footnote 101
India’s CSR spending regime initially applied on a “comply-or-explain” basis, but it became mandatory (“comply or be penalized”) for large companies following an amendment in 2021,Footnote 102 thus showing a progressive hardening of heterodox stakeholderism. The statutory definition of CSR in the Companies Act is very broad in covering a wide range of social objectives involving external stakeholders, such as eradicating extreme hunger and poverty, reducing child mortality and improving maternal health, combating the human immunodeficiency virus, acquired immune deficiency syndrome, malaria, and other diseases, ensuring environmental sustainability, and contributing to the Prime-Minister’s National Relief Fund.Footnote 103 The 2021 amendment also explicitly excluded from the definition of CSR activities undertaken in the normal course of business or outside of India, sponsorships from which the company derives marketing benefits, and activities that benefit employees, among others.Footnote 104 The far-reaching welfare objectives of the CSR provisions, combined with the exclusion of benefits to employees, are indicative of a mode of heterodox stakeholderism in developing countries that overly aims to complement the state’s role and compensate for government failures.Footnote 105 While philanthropic spending has greatly increased following the reforms in key areas such as health, education, and sanitation, India’s CSR model under concentrated ownership has produced concerns about corruption and cronyism through contributions to government funds and has failed to solve the country’s deep-rooted social and economic problems.Footnote 106
Interestingly, India’s approach to mandatory CSR is not alone in the developing world. In 2007, Indonesia became the first country to introduce mandatory corporate social responsibility requirements for corporations operating in the business of natural resources or impacting natural resources. This mechanism deviated from Global North practices and, therefore, was not captured by then existing comparative literature.Footnote 107 The mandatory provisions withstood constitutional scrutiny, with the Constitutional Court of Indonesia noting that the voluntary nature of CSR is not universal but rather depends on the culture of each country.Footnote 108 Pushed by NGOs and resisted by domestic elites, the CSR requirement in Indonesia is plagued by a lack of enforcement mechanisms.Footnote 109
Moreover, in 2009, Mauritius preceded India as the first jurisdiction to require the allocation of 2 percent of profits to CSR activities.Footnote 110 The move followed a “neoliberal” turn in Mauritius politics, with the government seeking to slash taxes while lowering social spending.Footnote 111 Government representatives viewed the rule as a “tax,” though “an intelligent tax because government has left the management of this tax in the hands of the private sector.”Footnote 112 A study on the Mauritius experiment found that, despite critiques, all respondents considered that CSR has a role to play in the development of Mauritius.Footnote 113 Similarly, in 2016 and 2020 statutes, Nepal adopted mandatory corporate social responsibility spending of 1 percent of annual profits for industrial enterprises and banks to be allotted to sectors ranging from community health services and community schools to roads and sewage.Footnote 114 Nevertheless, commentators have criticized Nepal’s mandatory CSR regime as “impracticable” given local constraints and the fact that it was “hastily legislated by replicating the Indian law.”Footnote 115
10.4 Corporate Social Responsibility Committees in India and South Africa
In addition to mandating corporate social responsibility and imposing minimum spending, developing jurisdictions have also pioneered the creation of governance arrangements designed to protect stakeholder interests in the form of dedicated board committees.Footnote 116 For example, South Africa’s Companies Act of 2008 innovated by instituting a social and ethics committee, whose significance in giving legal backing to a stakeholder approach “cannot be gainsaid.”Footnote 117 State-owned companies, listed companies, and companies meeting certain metrics of public interest must have a social and ethics committee with at least three members, one of whom must not be involved in the day-to-day management of the company.Footnote 118 The social and ethics committee, among other things, must monitor the company’s activities in view of legislation and prevailing codes of best practices on social and economic development and good corporate citizenship, including the UN Global Compact Principles, the OECD recommendations regarding corruption, the Broad-Based Economic Empowerment Act, promotion of equality, environmental matters, consumer relationships, labor, and employment matters.Footnote 119
The social and ethics committee must draw matters to the attention of the board as appropriate, but, unlike typical board committees, it also reports directly to shareholders.Footnote 120 South African commentators have debated whether the new committee has the nature of a board committee, a shareholders’ committee, or a sui generis organ of the company.Footnote 121 Despite open questions about its functioning and impact, the social and ethics committee has been hailed as a “new and creative innovation”Footnote 122 that reflects a distinct “procedural approach” to the protection of stakeholders.Footnote 123
Similarly, India’s Companies Act of 2013 also requires a CSR Committee for companies subject to the CSR spending requirements.Footnote 124 The CSR Committee formulates and recommends the CSR policy to the board, suggests the amount of expenditures to be incurred, and monitors the CSR policy of the company from time to time.Footnote 125 The CSR committees of public companies must have at least three directors, one of whom must be an independent director.Footnote 126 Still, studies have denounced the CSR committee as “largely ineffective in practice,” finding a tendency to favor contributions to the Prime Minister’s National Relief Fund over other more labor-intensive efforts to conceive and implement CSR activities.Footnote 127
10.5 Stakeholder Empowerment in Enforcing Directors’ Duties and Bankruptcy in South Africa
Another strategy of stakeholder protection takes the form of stakeholder empowerment through the direct grant of governance rights to non-shareholder constituencies. The most paradigmatic manifestation of stakeholder empowerment is worker participation in company boards, a practice that is characteristic of the German model and widespread among continental European countries.Footnote 128 Allusions to worker participation in company management are more common in the constitutions of the Global South compared to Global North jurisdictions, with five and two constitutional texts of the largest economies in each group, respectively, referring to the concept.Footnote 129 Nevertheless, such exhortations are often soft and voluntary in the developing world, to the effect that significant worker participation in corporate boards remains much stronger in rich countries, particularly in Continental Europe.Footnote 130 Brazil, for instance, introduced a particularly timid version of employee board participation in 2010 which is limited to one worker representative in state-owned enterprises controlled by the federal government, and curiously such representative is not allowed to participate in discussions and voting concerning labor matters.Footnote 131
However, the Global South has pioneered distinct strategies of worker empowerment in corporate governance beyond codetermination. South Africa’s Companies Act of 2008 is “unusual” to a foreign observer in “the amount of power, including direct participation, it bestows on employee groups.”Footnote 132 Not only shareholders, directors, and officers, but also trade unions representing employees may initiate proceedings to prevent the company from behaving inconsistently with the Act.Footnote 133 The Companies Act also empowers trade unions and employees to enforce directors’ duties under the statute by allowing them to initiate director delinquency and disqualification procedures, which are exceptionally broad in South Africa,Footnote 134 and to commence derivative actions.Footnote 135 A suit brought by the trade union South African Airways Pilot Association and the Organisation Undoing Tax Abuse (OUTA) resulted in the disqualification of a board chair of South African Airlines, a state-owned enterprise.Footnote 136 Interestingly, the court declared the director delinquent for her lifetime, an unusually draconian outcome.Footnote 137
Concerns about unemployment and job savings played a significant role in the formulation of the new regime for business rescue proceedings.Footnote 138 South Africa has faced extraordinarily high levels of unemployment, even among developing countries.Footnote 139 The Companies Act gives a prominent role to labor by empowering trade unions and employees to ask the court to place the company in business rescue, requiring their consultation in the development of the business plan, and permitting them to address creditors at the meeting before the vote on the plan.Footnote 140 South Africa’s Companies Act also gives employees enhanced information rights by granting unions access to information for the purposes of initiating a business rescue proceeding and requiring that unions receive notification if the company provides financial assistance to a director.Footnote 141
Taken together, these employee rights are both distinctive and substantial compared to the norm in other jurisdictions, where workers’ rights generally take the form of codetermination, workers’ councils, or information and consultation rights in the context of corporate takeovers.Footnote 142 Here again, however, commentators have questioned whether these measures are effective and “likely to suffice to meet deep socio-economic challenges.”Footnote 143
While employee participation in business rescue proceedings appeared “surprisingly reticent” in the first years after the adoption of the Companies Act,Footnote 144 the high-profile bankruptcy of South African Airlines (SAA), a state-owned enterprise, paints a different picture. A union representing mostly white, Afrikaans-speaking employees filed a request for business rescue in late 2019 to avoid liquidation.Footnote 145 Subsequently, unions also successfully halted retrenchments prior to the proposal of a business rescue plan. A decision by the Labour Court of Appeal held that the best purposeful interpretation of section 136 of the Companies Act established that the presentation of a business rescue plan constituted a condition precedent for retrenchment, given that one of the main purposes of the business rescue procedure in South Africa is “the preservation of jobs.”Footnote 146 The Court stated that this interpretation was consistent with the Constitution, which “recognises the rights of employers but simultaneously protects a range of rights of employees that are central to the democratic model promoted by the Constitution read as a whole.”Footnote 147 International law firms have warned that the decision may deal a death knell to successful business rescue in South Africa by issuing a moratorium against retrenchments until the adoption of a business rescue plan that expressly addresses them.Footnote 148
10.6 Racial Inclusion and Diversity in Corporate Governance in Malaysia and South Africa
Racial and ethnic tensions have been particularly strong in shaping democracy and capitalism in the Global South.Footnote 149 Global South jurisdictions have also pioneered efforts at affirmative action in corporate governance as a means to ease ethnic tensions and redress historical economic inequities across racial lines. As noted by Howk-Aun Lee and Lumkile Mondi, “Malaysia and South Africa conduct two of the most extensive affirmative action programmes in the world and, perhaps most distinctively, the policy encompasses the corporate sphere.”Footnote 150 This section examines Malaysia’s pioneering policies to advance Bumiputera (Malay) ownership of corporations since the 1970s, as well as South Africa’s focus on Black economic empowerment through corporate governance since the end of the apartheid regime.
10.6.1 Malaysia
Following independence, Malaysia’s constitution of 1957 explicitly provided for the reservation of quotas for the Bumiputera (Malays or “sons of soil”) in public service, education, and business permits.Footnote 151 At the time, Malays accounted for over half of the population but for only 2.4 percent of the country’s corporate assets, compared to the 27.2 percent owned by the Chinese, who represented only 34.4 percent of the population.Footnote 152 Growing ethnic tensions led to violent anti-Chinese riots in 1969 and to Malays’ fear of being “swallowed” by the Chinese.Footnote 153 In response to these tensions and the perception of endemic economic discrimination, the government adopted an ambitious New Economic Policy (NEP) in 1971, which placed a strong focus on affirmative action policies.Footnote 154
The NEP was based on two pillars: (i) “to reduce and eliminate poverty irrespective of race” and (ii) “to restructure Malay society so as to correct economic imbalance and eliminate the identification of race with economic function.”Footnote 155 Geared toward the improvement of the Malays’ vulnerable economic position, the NEP set a specific target of achieving 30 percent Bumiputera corporate ownership by 1990. Starting in 1976, companies seeking a listing on the local stock exchange had to allocate 30 percent of the issued shares to the Bumiputera, a requirement that was later reduced to 12.5 percent in 2009.Footnote 156 Other legal and regulatory strategies harnessed to increase Bumiputera ownership included the use of public investment vehicles for the benefit of Bumiputera, the requirement that companies operating in the old industry have both a majority Bumiputera ownership and Bumiputera representation on the board and other key positions, as well as the allocation of at least 30 percent ownership during privatizations.Footnote 157
Although there are significant controversies surrounding measurement, existing estimates suggest that Bumiputera ownership reached 19 percent in the 1990s and peaked at 23.4 percent in 2011 before falling to 16.2 percent in 2015, when there was a corresponding increase of foreign ownership and the expense of both Bumiputera and non-Bumiputera ownership.Footnote 158 In 2015, the Eleventh Malaysia Plan expanded the scope of the 30 percent target by including a notion of “effective control,” without, however, specifying its contours.Footnote 159 In 2019, Malaysia’s “Shared Prosperity Vision 2030” decried the “crowding out” effect of rising foreign ownership, which “impedes Bumiputera ability to compete in equity ownership.”Footnote 160
The NEP also aimed to increase Malay presence in high corporate levels, though it did not impose specific legal requirements.Footnote 161 Board representation of Bumiputera increased significantly from their virtual absence at the time of independence to 11.74 percent in 1974 and 46.52 percent in 2010.Footnote 162 Initially, Bumiputera directors were not involved in management and their role was mostly symbolic.Footnote 163 Nonetheless, their presence was politically significant in securing corporate contracts and licenses from the state, and arguably helped reduce their marginalization.Footnote 164 The NEP officially ended in 1990 but policies to promote Bumiputera inclusion continued through other programs.Footnote 165
The original and successor policies of affirmative action for the Bumiputera in Malaysian corporate governance have been, and remain, highly controversial. Critics regard these policies as an institutionalized form of racism against the ChineseFootnote 166 and as an instrument of crony capitalism.Footnote 167 Interestingly, Malaysia achieved its “economic miracle” in the decades from 1970 to 1990 while simultaneously attaining most of its affirmative action goals.Footnote 168 One interpretation is that “the NEP may actually have boosted the growth rate when sociopolitical factors are taken into account.”Footnote 169 In warning South Africa against the risks of state intervention of the economy, the World Bank came to describe Bumiputera policies in Malaysia as “a case of redistribution via market mechanisms,” a view that unduly downplays the degree of state involvement in the program.Footnote 170 While Malaysia’s efforts at ethnic inclusion in corporate governance failed to eradicate poverty and to eliminate Chinese economic dominance, they helped create a significant Malay middle class and negotiate racial tensions that thwarted the development of a market-based democracy.Footnote 171
10.6.2 South Africa
South Africa has also played a leading role in promoting racial diversity in corporate governance. Despite sharing a common background of past slavery and longstanding racial inequities with South Africa, the United States has only recently and timidly begun to discuss policies for racial inclusion in corporate governance.Footnote 172 By contrast, since the end of apartheid in South Africa and the beginning of the new constitutional order, corporate ownership and governance have been at the forefront of the country’s ambitions for social transformation.
In a 1990 speech after his release from prison, Nelson Mandela denounced the concentration and racialization of economic power in post apartheid South Africa, as illustrated by his statement that “less than ten conglomerates control almost 90 percent of the shares listed on the Johannesburg Stock Exchange,” and that their directors would “almost exclusively be white males.”Footnote 173 “If we are genuinely interested in ending the old social order and bringing in a new one, characterised by the notions of justice and equity,” he contended, “it is quite obvious that the economic power relations represented by the reality of the excessive concentration of power in a few white hands have to change.”Footnote 174 While conceding that international experience may counsel against tampering with the corporate power structure, Mandela pointed to the reality of South Africa, “with its own history, its own reality and its own imperatives” – one of which “is to end white domination in all its forms, to deracialize the exercise of economic power.”Footnote 175 He also cautioned that “growth by itself will not ensure equity,” noting “that any democratic government will have to respond to the justified popular concern about the grossly unequal distribution of economic power.”Footnote 176
In the 1994 Reconstruction and Development Programme of the African National Congress (ANC), a “central objective” was to “de-racialise business ownership completely through focused policies of black economic empowerment.”Footnote 177 The incoming government perceived that continuing white economic power and racial inequality could create “social and racial tension” in the new regime at the risk of social and economic stability.Footnote 178 The first wave of Black Economic Empowerment (BEE) initiatives came from the private sector through sales of unissued stock to a Black person or Black-run company.Footnote 179 There were 231 such BEE deals by 1998, leading to Black businesses owning an estimated 10 percent of Johannesburg Stock Exchange companies.Footnote 180
Beyond transformational objectives, some commentators have posited that BEE served as a “populist” policy of appeasement that allowed the government to rely on existing white businesses to generate growth while “maintaining legitimacy in the eyes of trade unions and the impoverished masses.”Footnote 181 Transfers from BEE initiatives were usually made to politically-connected Black individuals with strong ties to the ANC government but with little business experience.Footnote 182 Seeking to deflate pressure for unknown Black partners, companies sought politically influential Black partners who could push for policies to the benefit of capital and who had networking capabilities to support the business.Footnote 183
Although government financing also played a role, this first generation of BEE transactions was mostly financed by vendor loans and secured by future earnings of the company, often at a significant discount over the market price.Footnote 184 This strategy led to the indebtedness of Black investors and was compromised by the Asian stock market crash in 1998, which contributed to a decline in the number of empowerment transactions.Footnote 185 In view of concerns that the first wave of BEE only led to a “small wealthy black elite,” the government proposed a more expansive initiative of “broad-Based Black Economic Empowerment” (B-BBEE) in 2003.Footnote 186 B-BBEE’s foundational policy document justified the program as promoting social stability in a society characterized by entrenched inequalities. It noted that, in the context of South Africa, redressing racial discrimination was not only a “socio-political and moral imperative,” but also “an imperative dictated by the need for sustainable growth.”Footnote 187
Under the Broad-Based Black Economic Empowerment Act of 2003, the Minister of Trade and Industry would issue a code of good practice, creating indicators and qualification criteria for the purposes of procurement and other economic activities.Footnote 188 Unlike its predecessor, which focused on transfers of stock ownership, B-BBEE promoted a “balanced scorecard” combining different metrics relating to Black equity ownership, Black people in senior management, procurement from Black firms, skills development, and socio-economic development.Footnote 189 The final score relies on a point-system for compliance with measures of Black empowerment, such as 25.1 percent stock ownership, 60 percent participation in senior management, and 50 percent procurement, among various others. Thus, this system allows different dimensions of inclusion to be traded off against each other.Footnote 190 Compliance with the B-BBEE scorecard is not mandatory, but encouraged by various benefits in public procurement and licenses that trickle down the supply chain.Footnote 191 A 2013 amendment to the Act criminalized misrepresentations of a company’s compliance status (known as “fronting”) and established the B-BBEE Commission as a monitoring body.Footnote 192
Racial inclusion in corporate governance in South Africa has come a long way since the Apartheid era, when legislation such as the Labour Relations Act (1956) prohibited Blacks from holding directorships and management positions.Footnote 193 By 2011, 27.6 percent of board members were Black non-executive directors, and 9.5 percent of executive directors were Black.Footnote 194 According to the 2020 report by the B-BBEE Commission based on data from reporting entities, 43.6 percent of directorships were occupied by Black persons (23.08 percent male and 20.55 percent female) and 53.67 percent were occupied by white persons and foreign nationals.Footnote 195 Black ownership of reporting companies was 29 percent in 2019.Footnote 196 Although this percentage disappointingly reflects “a low level of economic transformation at the board level,”Footnote 197 racial inclusion in South Africa is highly favorable when compared to Brazil, where a recent survey found no Black board members and only 1.05 percent Brown members despite majority representation in the population.Footnote 198
The B-BBEE Act of 2003 also paid attention to intersectionality by listing as one of its key objectives “increasing the extent to which black women own and manage existing and new enterprises, and increasing their access to economic activities, infrastructure and skills training.”Footnote 199 Moreover, the statute also specifically allowed the code of good practice to “distinguish between black men and black women.”Footnote 200 The B-BBEE scorecard came to measure Black women empowerment separately, with five out of twenty-five points in the ownership section and five out of nineteen points in the management control section concerning the inclusion of Black women.Footnote 201 Interestingly, the B-BBEE Act of 2003 was enacted in the same year that Norway promulgated its pioneering legislation mandating gender quotas for corporate boards. Nevertheless, while Norway’s model for increased diversity in corporate governance has been widely celebrated and influential, South Africa’s groundbreaking effort to promote racial and gender diversity has been largely neglected by the international literature.
While B-BBEE policies remain controversial and contested,Footnote 202 there is a consensus that they have fallen short of expectations of deep social transformation, at least for the time being.Footnote 203 In 2007, a study by Daron Acemoglu, Stephen Gelb, and James Robinson concluded that B-BBEE policies benefited a small African elite and had no noticeable impact on inequality, though they increased the national income share accruing to Black people.Footnote 204 The authors contend that among the potential social benefits of such empowerment policies is the avoidance of destructive forms of populism that could otherwise gain ground in South Africa due to high inequality.Footnote 205
There is little question that South Africa’s empowerment measures are heterodox and avant-garde manifestations of policies for the democratization of capital more recently proposed in the Global North. In discussing Piketty’s book Capital and Ideology, scholars have cited B-BBEE as evidence that “the well-intentioned, even radical policies that have been proposed by Piketty have been already proposed and implemented in South Africa.”Footnote 206 While B-BBEE illustrates a sort of implementation avant la lettre of Piketty’s proposal for “participatory” socialism initiatives, South Africa’s experience shows “how difficult it has been for policies to have substantial impact in this inequality regime.”Footnote 207
Finally, South Africa’s experience with Black economic empowerment illustrates how the international legal order can restrict heterodox stakeholderism in the Global South. Italian investors initiated investment arbitration against South Africa under a bilateral investment treaty in the Foresti case in 2010, claiming that the Mining Charter’s requirement of a transfer of 26 percent of mining assets to historically disadvantaged South Africans constituted indirect expropriation and violated the obligation of fair and equitable treatment.Footnote 208 Although the case was settled before a final decision on the merits, the investor’s challenge played a key role in South Africa’s decision to terminate various bilateral investment treaties and adopt the Protection of Investment Act of 2015. The act provides for dispute resolution in domestic courts and aims to grant the government policy space to address “historical, social and economic inequalities” and “achieve the progressive realization of socio-economic rights.”Footnote 209 Even in the absence of international investment remedies, the need to attract foreign investment also moderates the impulse for radical forms of heterodoxy. A far more extreme version of Black economic empowerment in Zimbabwe under Mugabe aimed to transfer 51 percent shareholdings of foreign-owned companies to Black Zimbabweans. However, the initiative faced challenges of enforcement and was ultimately toned down to attract investment.Footnote 210
10.7 Conclusion
The study of corporate governance, including comparative corporate governance, has been plagued by a too narrow substantive focus on agency costs and a too narrow geographical focus on a handful of “usual suspects,” mostly from the Global North. By expanding the scope of analysis to incorporate concerns about externalities and inequality in corporate law and experiences from Global South jurisdictions, a different picture emerges. Rather than merely providing blind or imperfect copies of developed countries’ institutions, Global South jurisdictions have pioneered various institutional innovations to protect stakeholders and curb inequality. Yet, because developing countries are understudied and mostly analyzed in isolation, if at all, these important patterns have been largely ignored.
Appreciating the different manifestations of heterodox stakeholderism in the Global South not only expands our institutional imagination, but also sheds light on the driving forces behind the evolution of corporate law. I suggest that problems of state capacity in fighting inequality and mitigating externalities through other areas of law create both political and functional pressure on corporate law to address broader welfare objectives. In environments of rampant inequality and significant social and environmental degradation, the view that corporate law should focus exclusively on shareholder wealth maximization tends to lose legitimacy, if not economic justification. These pressures, which have long been felt in the Global South, are now reaching the Global North, bringing about the surprising prospect of “reverse convergence” in comparative corporate governance – with institutions of the developed world coming to resemble their developing country counterparts.
Heterodox stakeholderism in the Global South also responds to the distributional consequences of corporate law rules beyond jurisdictional boundaries, which are significant but have been thus far neglected. Upholding the limited liability of parent companies for environmental harm caused in developing countries is not only questionable on efficiency grounds but also has perverse distributive implications in enriching wealthy Global North companies and their investors at the expense of poor Global South victims. The erosion of limited liability of parent companies in developing countries likely responds not only to failures of their regulatory state in preventing harm but also to the South–North distribution dynamics that limited liability entails.
The experience of developing countries reveals a broader array of institutional arrangements aimed at protecting stakeholders and reducing inequality. It shows that institutional change is possible, but that corporate law reform is no panacea for deep economic and social problems. While well-intentioned reforms are less transformational than hoped for, they are likely not as catastrophic as one might have feared. For good or for bad, heterodox stakeholderism also faces problems of enforcement. The jury is still out on which heterodoxies, if any, may be worth embracing in developing and developed country contexts. Yet the time has come to incorporate the Global South’s experiences and innovations into the conversation.
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