Duties Beyond Shareholders

Abstract: There is a growing consensus among regulators, civil society, and even CEOs that corporations must consider the impact of their activities on a broad range of actors – not just shareholders. The need to do so is apparent from the externalities that corporations routinely impose on non-shareholders. Lack of legal accountability subsequently translates into low legal risk for corporate misconduct, which reduces the likelihood of prevention and results in three separate injuries to third parties: first, the initial corporate misconduct; second, denial of justice in the courts; and, third, the prospect of recurrence because of inadequate prevention. While contracting parties often rely on multiple third parties – not signatories to the contract – to play important roles in facilitating exchange, we deny this community protection from the externalities that contracting parties impose on them under a traditional view of contract as an exchange between two parties. This Article examines a corporation’s duties to others in its role as a contracting party. Contracts are the primary means through which corporations interact in the world; revising our views about the duties that contracting parties owe third parties has significant implications for our views of how corporations should treat non-shareholders. Normatively, this Article proposes an alternative view of contracts as an ecosystem with the following duty to contract in order to translate theory into practice: Contracting parties are required to take into account negative externalities to third parties when the contracting parties could reasonably foresee that performance of the contract would create a risk of physical harm to these third parties.