Justifying the Regulation of Corporate Behaviour A Functional Approach

Abstract

The traditional justification of the regulation of corporate behaviour (and its extent) was conceptually dependent on the establishment of a theory of the corporation. Although the Law and Economics movement’s championing of shareholder primacy represented the dominant view of corporate law, the increasing influence of the natural entity theory in promoting stakeholder interests and corporate social responsibility (CSR) initiatives makes it difficult to isolate a current prevailing theory. As a result, a better way for justifying the regulation of corporate behaviour lies in a functional examination of the corporation – if corporate behaviour affects stakeholders’ rights and interests in a sufficiently intimate way, some level of regulation is warranted. Regulations exist along a continuum, with self-regulation within an industry at one end (soft law) and explicit government regulation enforceable by the courts at the other (hard law). Due to the abstractness associated with the notion of corporate responsibility, especially in relation to the threshold of sufficient intimacy, soft law initiatives are therefore the most appropriate manner of regulating corporate behaviour in Australia.