Meadows defines a system as “a set of elements or parts that is coherently organized and interconnected in a pattern or structure that produces a characteristic set of behaviours, often classified as its function or purpose”. Today, the world can be recognized as a complex system consisting of the three main elements of the economy, society and the environment. Economies are made by the people of society, which are inherently a part of the environment. In turn, society and the economy cannot function without a healthy environment. Therefore, these three units are inextricably linked to each other through a “holarchical” (holistically hierarchical) relationship. This system can be depicted as the concentric circle model of sustainability. Reflecting this eco-centric view, the purpose of this system is to maintain its sustainability. In this nested structure, the corporation can be positioned within the inner circle of the economy since it is an “iconic business organization”. In line with this, the capacity of corporate activity should be limited by the boundaries of, first, society and ultimately, the environment. Nevertheless, the traditional legal set of corporate law does not acknowledge the embeddedness of the corporation into the system and therefore, neglects these social and ecological limits.
The Conventional View of the Corporation
Corporate laws are often developed with an inside-out approach. In other words, they regulate the corporation`s relationship from the perspective of the corporation. Inevitably, this “egocentric” approach favours the corporation`s interests over the interests of other system participants. As a result, anything that is not endogenous to the corporation can easily become a low priority. This, however, has led to the misunderstanding that the corporation can be exonerated from the responsibility it owes to society and the environment and caused the corporation to be estranged from the communities it was once a part of.
Before the 20th century, a corporation could easily be considered a societal institution. During that time, companies were mostly operating as extensions of the states, given authority through legislation and were entrusted with certain public projects with a limited timeline. However, as a result of the laissez-faire approach, anti-regulatory movements were adopted, and corporations were soon freed from legislative limitations imposed on them by the states. This was also when the intimate connection between corporations and society started to part ways. This estrangement got worse with the dominance of shareholder primacy in the 2000s. Since then, corporations` main concerns have become making sure that directors are being held accountable and shareholders are well satisfied financially. This approach soon turned corporations into “money monsters” which pursue activities with detrimental effects on society and the environment. As for the societal aspect, current business models are considered to be significant contributors to the growing inequality and non-inclusive growth. In terms of the environment, the most obvious one can be seen through climate change. The Carbon Majors Report (2017) found that more than 70% of all anthropogenic greenhouse gas emissions since 1988 can be attributed to 100 active fossil fuel companies, such as Shell, BP and Exxon, making them the biggest contributor to human-induced climate change.
Nevertheless, as neoclassical economists took the easy way out by merely labeling these adverse effects on society and the environment as “externalities”, the corporation has also become indifferent to these societal and environmental challenges. However, this is a view that does not match the realities of the modern world. Instead, the corporation should be considered a living organism that is a part of the wider socio-ecological system. Thus, to survive, it needs to adapt to the habitat it is living in. At this point, the holistic approach of systems thinking can stimulate a fundamental rethink of the modern corporation, its role in the system and improve the corporation`s contribution to the overarching purpose of the system: sustainability. In doing so, as the legal field with the most dominant influence on the corporation, corporate law should be utilized as a powerful regulatory tool to bridge the gap between the interests of the corporation and other system participants.
Using Systems Thinking in Corporate Law
Apart from a few exceptions, the potential of systems thinking has not been exploited by corporate law. The origins of systems thinking can be traced back to the 1940s with the work of Ludwig von Bertalanffy. As a biologist, Bertalanffy`s goal was to understand living systems, and most specifically, the human body, from the perspectives of different scientific fields. Systems thinking, however, was not limited to its initial focus and was later used by other disciplines to address the challenges of the modern world. For instance, as an ecologist economist, Raworth used systems thinking while formulating the “doughnut”. This way, she introduced a new understanding of the economy that makes it fit for the 21st century.
Taking this as an example, if corporate law can start perceiving the corporation as a part of the system, rather than isolating it, it can accelerate its transformation to a form that supports the overarching sustainability purpose. By using systems thinking, it can start to see the “bigger picture”, shift its firm-focused approach and realize that the corporation is a unit in the integrated structure. This practice can also be used to challenge the conventional norms of corporate law, such as agency theory, that are inherited from the last century. Moreover, since the outer layer of the system is constrained by ecological limits, systems thinking can also promote a science-based sustainability approach to corporate law by making sure that corporate activity adheres to the planetary boundaries. In brief, using systems thinking in corporate law can facilitate the (re)integration of the corporation into the system and (re)align corporate purpose with the overarching purpose of the whole system in line with the changes in the demands of society and the state of the environment.
Concluding remarks
The societal and environmental problems that corporations are currently asked to deal with have previously been refuted by the arguments under the economic approach to the corporation which is narrowly focused on the internal matters of the corporation and neglects the social and ecological layers surrounding it. Nevertheless, this view of the corporation can no longer keep up with the necessities of the 21st century. At this point, practicing the holistic approach of systems thinking can bring important changes to the perspective of corporate law by providing it with fresh eyes to redesign the corporation and acknowledge its embeddedness in the system. This way, corporate law can also realign corporate purpose with the sustainability purpose which is required for the continuity of the whole system.