Is corporate power legitimate? Academic calls for a rethink

Changes to Aotearoa New Zealand’s company law in 2023 saw directors encouraged to consider environmental, social and governance factors in their decision-making.

This could soon be reversed in what will be a giant step backwards, says the author of a new book that takes aim at the unchecked power of big corporations, arguing that many operate with the influence of governments but without much accountability.

The author, law academic Dr Peter Underwood, says there's a "legitimacy deficit" when it comes to large companies globally—a problem rooted in diluted governance, inflated growth and a lack of debate over the meteoric rise of corporate groups.

He says companies can provide great benefits to the economy, yet somewhat paradoxically, they can cause economic and social harm.

It’s from this position that Dr Underwood critiques the 'shareholder comes first' model, where companies prioritise shareholder wealth above all else, often at the expense of long-term stability, environmental consideration and broader social responsibility. He says this outdated approach fosters short-term thinking and leaves corporations unaccountable for their actions.

His solution? A shift to a pluralist social model that considers the interests of all stakeholders—not just shareholders.

“By creating greater parity between stakeholders and shareholders, corporations could align with societal needs while exercising their power more responsibly.”

Unlike the current focus on maximising profits, this approach, says Underwood, would push corporations to consider broader goals.

"It would require corporate managers to prioritise social responsibility as a critical duty, not just an option. Focusing on long-term impacts would help avoid short-term thinking that can harm both the company and society."

Overall, he argues that this model would ensure that corporate actions benefit everyone—not just shareholders—making corporate power more balanced and fair.

He says a pluralist perspective is better than a pure social model, as it can be better incorporated into the capitalist economy in which the modern corporation already functions.

His new book, Corporate group legitimacy: reconceptualising the corporate group, also delves into the legal and historical reasons behind the unchecked rise of corporate groups and maps their size through empirical data.

Underwood traces how, over time, the law became more facilitative of corporate growth, allowing companies to expand and consolidate power with little oversight.

"This departure from earlier, often more restrictive control mechanisms, has resulted in corporations holding concentrated power without the responsibility to match."

The law scholar suggests that this legitimacy deficiency can also be addressed with the help of new technologies and innovative governance models.

He argues that by moving beyond shareholder primacy and embracing a more pluralist approach, corporations could realign with their societal role, exercising their power to benefit both shareholders and the broader community. In doing so, they could gain legitimacy in the eyes of society and the law.

Check out the book here.