4. The Institutional Turn in Corporate Governance Towards Addressing Corporate Externalities and Public Goods

Traditionally, the academic literature on corporate law and governance has cabined problems of externalities—unpriced economic effects on nonconsenting third parties—to other legal domains, such as tort law and employment law. However, the most critical private-ordering mechanisms of corporate governance, including executive compensation and takeover discipline, depend critically on market prices, which may be incomplete if externalities are present. The central argument of this chapter is that many corporate social responsibility efforts and ESG investments are in fact best understood as private-ordering responses to the information and incentive problems arising from corporate externality problems. Because externalities are ordinarily unpriced in market transactions, social enterprises that consider externalities in their decision-making face unique institutional challenges: information costs, coordination costs, and other transaction costs. Legal, institutional, and private-ordering developments are already advancing to meet these challenges. The chapter argues that an area ripe for future research is institutional and legal design that minimises information, transaction, and agency costs for coalitions of stockholders with similar preferences that seek to coordinate corporate production around non-financial objectives.