Corporate Purpose Beyond Borders: A Key to Saving Our Planet or Colonialism Repackaged?

The “corporate purpose” debate has captured the attention of academics, lawyers, policymakers, and entrepreneurs around the world. Leading corporate governance scholars see it as one of the “hottest public policy issues” of our time. Governments have embraced legislation to make corporations more purposeful and financial titans have pledged over 100 trillion dollars under their management to foster a broader conception of corporate purpose globally. The realization that climate change is likely the issue of the century and that any chance of successfully addressing it will require a change in the way corporations are governed, seems to justify the attention that the corporate purpose debate is receiving. And yet, the corporate purpose debate, while extremely important, has largely been built on an understanding of corporate law and governance that is local – jurisdiction bound – while the issue of climate change is global; pollution does not respect jurisdictional borders.

As Roza Nurgozhayeva and Dan W. Puchniak explain in their recent ECGI Working Paper –Corporate Purpose Beyond Borders: A Key to Saving Our Planet or Colonialism Repackaged? – this myopic, jurisdictionally bound, conception of corporate purpose forms the logical foundation for Milton Friedman's (in)famous 1970s New York Times article “The Social Responsibility of Business Is to Increase Its Profits”. In Friedman’s jurisdictionally bound world, local elections and each country’s democratic process are the linchpins holding together his theory that policy decisions related to social responsibility should be left to governments – not the management of companies – justifying his core argument that the focus of companies should be maximizing shareholder value. The idea that externalities, such as pollution, may cross jurisdictional borders and that, in turn, those impacted by extraterritorial externalities would not be part of the democratic process, was not contemplated in Friedman’s seminal article – a fact that those who both love and loath Friedman’s article have almost entirely overlooked.

Friedman’s domestic, jurisdictionally bound, understanding of corporate purpose is not an aberration in the leading academic discourse on corporate purpose – it is the norm. The Anatomy of Corporate Law, which is widely considered to be the world’s leading comparative corporate law treatise, frames its discussion of corporate purpose around “local communities” and the interests of “society”. The primary tension in the corporate purpose debate among legal academics – whether to protect non-shareholder stakeholders inside or outside the corporate law – presupposes that the company in question is within the jurisdiction of the government making this policy decision. This illustrates how the extraterritorial effects of companies, and the formal and informal legal mechanisms used to manage those effects extraterritorially, have almost entirely escaped the current academic understanding of corporate purpose.

However, many of today’s pressing environmental and societal issues, including climate change, are clearly global. As a result, a panoply of informal and formal legal mechanisms has been produced by states, multinational firms, and transnational organizations that aim to shape corporate purpose beyond jurisdictional borders. Collectively, these mechanisms have created the “globalization of corporate purpose”, raising myriad possibilities for effectively addressing global issues, the most prominent of which is climate change. However, the globalization of corporate purpose is not unambiguously a force for good. When powerful-states, powerful-firms, and powerful-organizations define corporate purpose beyond borders it risks corporate purpose being defined in the interest of these powerbrokers, to the detriment of less powerful communities around the world.

Especially in the context of this special ECGI Blog series on Asia, China’s role in shaping corporate purpose beyond borders deserves special attention. As the world’s second-largest economy and a major player in global trade and investment, China’s approach to corporate governance and sustainability has significant implications for the global business landscape. Our research reveals that China’s stance on extraterritorial corporate governance differs markedly from that of the EU or the United States, and specifically California. While the EU has aggressively pushed its stakeholder-focused conception of corporate purpose globally through initiatives like the Corporate Sustainability Reporting Directive (CSRD), China has taken a more restrained approach. 

This is rooted in China’s principle of non-interference in the domestic affairs of other states, which extends to its corporate governance policies. The Belt and Road Initiative (BRI), China’s ambitious global infrastructure development strategy, provides a prime example of this approach. Despite its enormous scale and potential for shaping corporate behaviour across multiple jurisdictions, the BRI has not explicitly push for standardized sustainable corporate governance practices across its member states. Instead, it emphasizes state sovereignty and the right for each country to pursue its own developmental goals.

This non-interventionist stance is further reflected in China's approach to its multinational corporations. Unlike their Western counterparts, which often act as conduits for exporting corporate governance standards, Chinese multinational firms are encouraged to respect a “host country standard” by adapting to local governance norms rather than imposing their own. This creates a stark contrast with the “IKEA Effect” or “BlackRock Effect” observed with Western multinational companies and investors. Moreover, our research indicates that China has largely insulated itself from the influence of Western-driven corporate governance trends. For instance, while institutional investors now play a significant role in shaping corporate governance in many markets, almost all shares owned by institutional investors in Mainland China are held by Chinese entities. This limits the impact of initiatives like the “BlackRock Effect” within China's borders. 

China’s Ministry of Finance followed the same trend in May 2024, when it issued a draft of the Chinese Sustainability Disclosure Standards for Business Enterprises (CSDS) – Basic Principles that set general requirements for corporate sustainability disclosure and apply to companies established in China. The Ministry plans to introduce climate-related disclosure standards by 2027 and roll out China-wide corporate sustainability disclosure standards by 2030. There is no intention to adopt a “one-size-fits-all mandatory approach”, but rather gradually phase-in voluntary and mandatory reporting for listed and non-listed companies to consider the development stage and disclosure capabilities of Chinese companies. While the CSDS seems to focus on Chinese companies, another landmark initiative introduced by China’s major stock exchanges in Shanghai, Shenzhen, and Beijing may have a potential extraterritorial effect through supply chains and dual listing. The three stock exchanges have released mandatory sustainability reporting guidelines effective from 1 May 2024. The guidelines require listed companies with a large market capitalization, as well as those with dual listings, to disclose a broad range of sustainability topics, including climate change, pollution control, ecosystem protection, rural revitalization, and ethics of science and technology. 

Although both the CSDS and the guidelines build on the ISSB Standards, there is a fundamental difference – the adoption of the double materiality principle that requires companies to report on issues they find financially material as well as their impact on the economy, society and the environment (impact materiality). The adoption of double materiality makes China the second jurisdiction in the world, along with the EU, to follow this path. 

This raises the question of whether China is moving towards the EU standard of stakeholder-focused sustainable corporate purpose, which calls for future research. At this point, it seems unlikely. Both CSDS and the guidelines introduce sustainability disclosure with “Chinese characteristics,” drawing on China’s market conditions, domestic disclosure systems, national values, and priorities. They primarily target companies within China’s jurisdiction, which means they uphold China’s noninterference philosophy. 

The rise of BRICS+ and China's recent watershed initiatives and economic influence suggest a potential shift in the global corporate governance landscape. As these emerging economies gain more say in international affairs, we may see a move away from a EU conception of a one-size-fits-all approach to corporate purpose. Instead, a more diverse, regionally focused model of corporate governance may emerge, with China playing a pivotal role in shaping this new paradigm.

In conclusion, understanding China's approach to corporate purpose beyond borders is crucial for grasping the full complexity of the global corporate governance landscape. As the world grapples with pressing issues like climate change, the interplay between China’s non-interventionist stance and the more aggressive approaches of other major economies, exemplified by the EU, will significantly influence how corporate purpose evolves on a global scale.

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By Roza Nurgozhayeva (Graduate School of Business, Nazarbayev University) and Dan W. Puchniak (Yong Pung How School of Law (YPHSL), Singapore Management University and ECGI)

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