Research Categories: Contract Law and Theory

In 2019, the Business Roundtable announced its commitment to all corporate stakeholders – consumers, employees, suppliers, and communities – and not only shareholders. This announcement has re-awakened an old debate over corporate social responsibility. “Stakeholderism advocates” argue that corporate leaders must take into account the interests of the various stakeholders impacted by corporate decision-making. “Stakeholderism critics” challenge this view, expressing concerns that stakeholderism will magnify managerial agency costs, chill regulation, risk inauthenticity, and lead to impractical solutions.

This Article proposes “contractual stakeholderism” to operationalize stakeholderism in accordance with its advocates but in a way that is attentive to the concerns of its critics. Normatively, it advocates for a shift from a benefits-based approach for stakeholderism to one focused on the prevention of harms. The former often justifies stakeholderism by highlighting the various benefits that stakeholder protection can offer for advancing shareholder value or other advantages for the corporation. But this basis for stakeholderism will fall short because it is not always true that what is good for the stakeholder is good for the shareholder; instead, sometimes their interests conflict. In these situations, the benefits-based approach will inevitably lead to the prioritization of the shareholder over the stakeholder. That is why this Article advocates for a harms based approach that focuses on the risks that a corporation’s activities create for stakeholders. This latter approach applies to a wider range of corporate activity and protects a broader range of stakeholders than the scope of the benefits-based approach. This Article justifies the normative shift to a harms-based approach by identifying five dimensions of inequality that place stakeholders at unique risk of harm from corporate conduct: notice, choice, risk management, legal remedies, and the fruits of exchange. Practically, it explains that many stakeholder harms arise from the contracting choices that corporate leaders negotiate, draft, and bind their companies to perform. A harms based approach would require corporate leaders to design contracts differently to mitigate or eliminate the risks that their contracts create for stakeholders. In order to incentivize corporate leaders to do so, this Article concludes by proposing the following duty: Corporate leaders, as contracting parties, must take into account the interests of stakeholders when performance of the contract creates a risk of physical harm to them.

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Corporations routinely impose externalities on a broad range of non-shareholders, as illustrated by several unsuccessful lawsuits against corporations involving forced labor, human trafficking, child labor, and environmental harms in global supply chains. Lack of legal accountability subsequently translates into low legal risk for corporate misconduct, which reduces the likelihood of prevention. Corporate misconduct toward nonshareholders arises from a fundamental inconsistency within contract law regarding the status of third parties: On the one hand, we know that it takes a community to contract. Contracting parties often rely on multiple third parties—not signatories to the contract—to play important roles in facilitating exchange, such as reducing market transaction costs, improving information flows, and decreasing the risk of opportunism.

On the other hand, we deny this community protection from the externalities that contracting parties impose on them. This article examines a corporation’s duties to others in its role as a contracting party. Normatively, this article proposes an alternative view of contracts as an ecosystem with three attendant principles that result from this view: (a) third-party protections from negative externalities, (b) contract design obligations of contracting parties, and (c) recourse to legal remedies for third parties. On a policy level, this article proposes the following duty to contract in order to translate theory into practice: Contracting parties are required to take into account negative externalities to thirdparties when the contracting parties could reasonably foresee that performance of the contract would create a risk of physical harm to these third parties.

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