It was 2021, and one of the biggest companies in the world, Amazon, was facing backlash over reports of alleged gender disparities within the company—not discrimination but disparity. Although the company had complied with all the legal regulations, activists, shareholders, and employees rallied for more transparency and actionable diversity goals. Like many other companies in the world, Amazon found itself answering to the formal legal framework of the corporate world and the ‘Soft’ laws- the unspoken norms and social standards shaping the corporate world today.
This shift towards informal governance standards—often driven by social, environmental, and ethical expectations—has become more pronounced in recent years. Companies today face a lot of backlash from stakeholders demanding adherence to social norms such as Diversity, Equity, and Inclusion (DEI) and environmental responsibilities. These social laws may not be legally binding, but they exert enormous influence over corporate behaviours and, ultimately, the company’s success.
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Soft Law in Corporate Ecosystem
The term ‘Soft Law’ refers to guidelines, principles and social standards that might not be enforceable by law but carry significant weight in shaping corporate practices. For instance, environmental, social, and governance (ESG) metrics have become a critical evaluation tool for investors despite limited formal regulatory frameworks mandating adherence.
According to a survey by Morningstar, in 2023, nearly 85% of investors in the U.S. indicated that ESG performance impacts their investment decisions. This trend is global: In the European Union, the Corporate Sustainability Reporting Directive (CSRD) mandates enhanced transparency in ESG disclosures starting in 2024, signalling how soft law pressures are moving closer to formal regulations. Companies failing to comply with these expectations risk losing access to capital markets or attracting negative publicity.
The Power of Stakeholders
Shareholders and employees are some of the most powerful agents of soft law enforcement. In 2022, 62% of S&P500 companies reported that shareholders proposed to comply with environmental and social standards, a significant rise from just 46% five years earlier. It is worth noting that among the proposals, DEI efforts dominated, reflecting the increasing pressure companies have to create a more inclusive workplace.
One example is Google’s 2021 employee-led push for increased pay transparency and commitments to reduce gender pay gaps. Despite no formal legal obligation, mounting social pressure led Google to publish detailed pay equity reports and revamp its HR policies. This case underscores how soft law arises not only from societal expectations but also from internal demands.
Diversity and Inclusion as Governance Norms
The reach of soft law can never be understated. As of 2023, 97% of Fortune 500 companies disclosed diversity statistics, even though only a handful of jurisdictions, like California, require gender and racial diversity disclosure. Pushing for diversity in a workplace is not just for aesthetic or casual reasons, as evidenced by a report by McKinsey, which stated that companies with a higher-than-average diversity were 35% more likely to outperform their non-diverse counterpart, a compelling reason for companies to push diversity in their workplace.
Although these norms are not yet legally binding, there’s no doubt that their influence is immense. For instance, BlackRock, the world’s biggest asset management company, made diversity a critical factor in voting for board elections, urging firms to increase representation from carious gender, race, caste and religion.
Transparency as a New Social Mandate
Transparency, particularly in supply chains and the company’s environmental impact, is another key dimension of soft law. A 2023 Edelman survey revealed that 72% of global consumers expect companies to share detailed sustainability efforts, and 64% are likely to boycott companies that fail to act transparently.
For example, in 2021, apparel giant Nike faced global criticism for its alleged lack of transparency regarding forced labour in its supply chain. While no law explicitly required disclosures about these labour practices at the time, the pressure led Nike to enhance its reporting on labour conditions, illustrating how soft law operates as an informal regulatory framework.
From Soft Law to Hard Law
Soft law often acts as a precursor to formal regulation. For example, the Paris Agreement, initially a set of non-binding climate goals, has catalysed legally binding carbon reduction targets across several countries. Similarly, investor-driven sustainability reporting standards such as the Global Reporting Initiative (GRI) have influenced government mandates, including the EU’s CSRD and upcoming SEC climate disclosure rules.
This trajectory suggests that corporations aligning early with soft law standards gain a competitive advantage, avoiding the scramble to comply when these norms transition to legal requirements.
Soft Laws Shaping the Future of Corporate Workplace
Soft law reshapes corporate governance by demanding companies go beyond legal compliance to align with societal expectations. These informal norms have significant financial and reputational implications, whether through transparency, diversity, or environmental stewardship. Study proves that pushing diversity in the workplace can benefit the company. However, one must take these claims with a grain of salt.
As stakeholders, including investors, employees, and consumers, enforce these standards, soft law is becoming a defining element of corporate accountability. While navigating unwritten rules can be complex, companies that embrace them proactively are better positioned to build trust, enhance resilience, and ensure long-term success in a rapidly evolving business landscape.
