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business judgment and the business roundtable on corporate social responsibility August 23, 2019

Posted by Bradley in : law , trackback

Alison Frankel discusses the implications of the Buisness Roundtable’s new Statement of Principles here. Will a Board that decides to act in the interests of non-shareholder stakeholders risk losing the protection of the business judgment rule or not?  The article predicts that when

“shareholder firms start filing suits claiming that directors shouldn’t be concerned with global climate change or overseas labor laws.. [t]he business judgment rule is going to get a whole new workout.”

As the article points out many of the shareholder primacy emphasizing decisions relate to M&A transactions. The context matters, I think. There’s a big difference between a decision about the value of the payout a shareholder will get as the result of such a transaction and a decision as to how to allocate the corporation’s budget. The first in some sense isn’t really a business judgment.

I think there is a risk of liability (following from disapplication of the business judgment rule)  if Boards decide to behave like Henry Ford, and announce that they are adopting climate friendly or employee friendly policies because it’s the right thing to do and they don’t care about shareholders.  And there are corporate executives who behave in ways that suggest some disinterest in compliance with legal rules (e.g. disruptive businesses designed to challenge existing structures and rules). But I don’t expect there to be many cases like this. Corporations are likely to engage in climate risk mitigation where the law requires them to do so (e.g. when the risks are seen as material) or where concerns for reputation turn the longer term issues of financial risk into shorter term issues of reputation risk. Do businesses stop using plastic straws to save the environment from plastic or because they think many of their actual and potential customers care about plastic pollution?

A business decision to engage in climate risk mitigation that is presented as a decision to protect long term value and the current reputation of the corporation should benefit from the protection of the business judgment rule. Whether investors will kick up a fuss is a different question.


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