Draft

Guest article by Professor Curtis J Milhaupt
William F. Baxter-Visa International Professor of Law, Stanford Law School and Senior Fellow, by courtesy, Freeman Spogli Institute for International Studies, Stanford University

For most of the past three decades, global business operated under an implicit peace dividend, benefitting from the end of the Cold War and major expansions in cross-border trade and investment. Companies could design supply chains purely for efficiency, raise capital and invest across borders with few political constraints, and treat geopolitics as a stable background condition rather than a strategic variable. That era has ended.

We have entered the age of geoeconomics—states’ use of economic leverage to pursue geopolitical goals. In this new environment, corporations are not merely market actors but instruments of statecraft—strategic partners of governments.

Economic interdependence between states, once seen as a guarantor of peace, has become a source of vulnerability and leverage that can be exploited by governments whose domestic firms control scarce resources such as rare earth minerals, or produce critical technologies such as semi-conductors. From technology export bans and compliance with economic sanctions to supply chain “friendshoring,” business decisions are now inseparable from national security considerations.

The new dimensions of corporate power

As governments deploy economic tools for strategic advantage, corporations have paradoxically gained and lost power at the same time.

On one hand, corporations are indispensable to national resilience—they design the chips, control the data, develop the technologies, and manage the supply chains on which economies and militaries depend. On the other, they face mounting pressure to serve objectives that extend well beyond (or even conflict with) maximization of profits for the benefit of their shareholders. One risk of this development is that companies’ efforts to use their influence and resources to meet enhanced environmental and social goals will be sacrificed to focus on the national security concerns and industrial policy objectives of their home governments.

Like ESG (environmental, social and governance) concerns, geoeconomics requires firms to internalise the externalities of their global operations—this time in the service of national security, geopolitical advantage and military strength.

Professor Curtis J. Milhaupt

Much of the influence governments seek to exploit for their own ends flows through firms with controlling shareholders (such as extraordinarily wealthy individuals or state-owned enterprise groups), state-linked pools of capital (such as sovereign wealth funds) and global capital networks dominated by huge institutional investors.

These powerful actors can shift production, data, investment, and jobs in ways that directly affect national interests. This entanglement of corporate and political power raises hard questions about accountability and democracy. The “military-industrial complex” used to refer to a small number of defense contractors with close ties to the government. If a broad swath of companies have now become geopolitical agents of the state, a host of potential problems may ensue, ranging from anticompetitive conduct to capture of public institutions by politically unaccountable actors.

National security meets corporate purpose

The intersection of business and national security is producing a new corporate mandate. Like ESG (environmental, social and governance) concerns, geoeconomics requires firms to internalise the externalities of their global operations—this time in the service of national security, geopolitical advantage and military strength. Companies are being asked to redesign supply chains, restrict exports, or exit markets not because it makes business sense, but because it aligns with perceived state objectives.

I have described this as the era of “ESG + G”—adding geoeconomics to the traditional ESG framework. Unlike the political backlash over ESG, however, in the United States this agenda enjoys bipartisan support in Washington. In fact, governments around the world today support measures to reduce dependence on geopolitical rivals. Yet this consensus conceals underlying issues: what happens when the pursuit of national security creates dependency on a few large tech companies, leads to excessive corporate lobbying, or sacrifices other worthy objectives such as employee welfare or protection of the environment? For instance, moving western supply chains away from China may strengthen democratic alliances but also shift production to countries with even weaker environmental or labor standards.

The rise of state capitalism

As corporations align more closely with the national strategies of states, the boundary between the private sector and the state becomes increasingly blurred.

We have already seen the rise of state capitalism in western economies in reaction to the perceived China Threat. The U.S. government took a “golden share” in U.S. Steel as a condition for approving its acquisition by Nippon Steel. The Italian government sought to protect Italian tire maker Pirelli from foreign influence by exercising its “golden power” to effectively neuter the governance rights in the company held by Chinese state-owned enterprise Sinopec.

Rising economic nationalism and closer business-government ties risk crowding out private sector innovation and fostering corruption. Politicians may steer investment to favored firms, and a government’s financial stake in a business not only places taxpayer funds at risk, but it may also distort managers’ incentives and insulate them from healthy market forces. Crony capitalism can develop in any economy, regardless of political regime type.

Transparency and accountability

Corporate governance has an important role to play in avoiding the dangers just described. My research shows that only about five percent of U.S. listed companies disclose which internal body—board, committee, or officer—is responsible for managing geopolitical risk. And virtually no companies disclose any information about how they seek to mitigate such risk.

As companies take on quasi-public roles, the public deserves to know how corporate decisions intersect with government strategies and democratic accountability. Measures such as clearer disclosure of risk oversight, greater transparency around corporate lobbying and influence, as well as stronger board expertise in global affairs, could help align private governance with public values. But there are no easy means of ensuring that newfound private-public partnerships for geoeconomics truly serve the public interest.

Ultimately of course, understanding geoeconomics is about much more than corporate risk management. It is about clarifying the social contract that binds business, government, and the public in an increasingly fragmented global order.

Professor Curtis. J. Milhaupt

Bloc convergence and the future of global business

Long gone are expectations of global convergence around shareholder value maximisation as the “End of History” for corporate law and governance. On its own, this development is no cause for lament. The ethos of shareholder wealth maximisation above all else has contributed to many social ills such as income inequality and environmental degradation. But the “return of history” to corporate governance, via the rise of China with a powerful alternative economic system and increasing geopolitical tensions, will be messy and unpredictable.

One potential outcome is the alignment of corporate governance models with the political values of their home blocs—democratic or authoritarian. Instead of global convergence around shareholder value, we may see clusters reflecting competing visions of capitalism—each of which are influenced by their home government’s geopolitical strategy.

For democracies in the Pacific, including New Zealand, the return of history presents both challenges and opportunities. US-China rivalry unquestionably places New Zealand in a difficult balancing act as an ally of the United States that also relies heavily on trade with China. At the same time, as trade and supply networks form among like-minded states, corporations and governments in democracies might serve as testing grounds for governance models that embed transparency and inclusiveness in these emerging blocs.

Conclusion

Ultimately of course, understanding geoeconomics is about much more than corporate risk management. It is about clarifying the social contract that binds business, government, and the public in an increasingly fragmented global order. The era of geoeconomics challenges us to rethink the foundations of corporate power. Firms now sit on the front lines of statecraft, yet their governance systems were built for a different age.

As global tensions mount, the challenge is for our institutions—legal, political, and economic—to ensure that the pursuit of national security and economic prosperity coexist with the preservation of democratic values and the promotion of other socially desirable outcomes.

The opinions expressed in this article reflect the views of the author and are not necessarily the views of Waipapa Taumata Rau, the University of Auckland.