Director Engagement: Necessary for ESG Success

• Date: 01 August 2022
• Author: Todd Phillips

8-2022 ENVIRONMENTAL LAW REPORTER 52 ELR 10641

COMMENT

by Todd Phillips

Todd Phillips is Director, Financial Regulation and Corporate Governance at the Center for American Progress.

DIRECTOR ENGAGEMENT:

NECESSARY FOR ESG SUCCESS

Leo Strine, Kirby Smith, and Reilly Steel ma ke an

important contribution to the corporate governance

literature. In their article, Ca remark and ESG, Per-

fect Together: A Practical Approach to Implementing an

Integrated, Ecient, and Eective Caremark and EESG

Strategy,1 they make the compelling case that Caremark’s

obligation that directors “be reasonably informed concern-

ing” the activities of their corporations— and be subject to

legal liability if they are not—provides a foundation upon

which directors can and should inform themselves as to

whether their companies are acting in ESG-forward or

otherwise ethic al manners.2

While Strine, Smith, and Steel include discussions of

Caremark liability and associated legal gloss, the practi-

cal “takeaway” from their a rticle is that directors must

be engaged with their companies’ ESG (or, as the authors

write, EESG)3 eorts, addressing those matters that pose

moral risk to their rms as well as those that only pose

legal ones. And importantly, director engagement on ESG

should not just be something that corporate boards imple-

ment, but that shareholders should be dema nding.

I. Informed Corporate Directors

Both primary theories of corporate governance today—

whether to be operated in the interest of stakeholders

or shareholders—require directors to be informed as to

their corporations’ activities. Under “stakeholder capital-

ism,” a company should operate in manners that benet

all it aects. For example, a 2019 letter from the Business

Roundtable and signed by the CEOs of some of America’s

largest corporations made “a fundamental commitment to

all of our stakeholders,” including customers, employees,

1. Leo Strine et al., Caremark and ESG, Perfect Together: A Practical Approach

to Implementing an Integrated, Ecient, and Eective Caremark and EESG

Strategy, 106 I L. R. 1885 (2021).

2. In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 970 (Del. Ch.

1996).

3. EESG stands for “employee, environmental, social, and governance.” Strine

et al., supra note 1, at 1885.

suppliers, com munities, and shareholders. Howeve r, the

perhaps most signicant criticism of stakeholder capitali sm

is that it “means reducing CEOs’ responsibility to share-

holders, not increasing their responsibility to workers or

society or anyone else.” Accordingly, for stakeholder capi-

talism to be eective, chief executives must not be given

carte blanche and directors must provide appropriate over-

sight that ESG commitments are being fu llled.

e other the ory of corporate g overnance is “sha reholder

primacy,” meaning that a company should operate solely to

benet its investors. Although this has traditionally meant

a focus on prots (Milton Friedman famously wrote, “there

is one and only one social responsibility of business—to use

its resources and engage in activities designed to increase

its prots”) this is not necessarily the case as sharehold-

ers increasingly care about investing in corporations that

are stewards for ESG values. Today, investments in ESG

funds total roughly $8 trillion worldwide with inows

only growing a nd the largest sh areholder of public compa-

nies, BlackRock ’s Larry Fink, annually writes to corporate

executives encouraging them to “act as a powerf ul catalyst

for change.” Clearly, whether because they believe com-

panies that have ESG focuses will be more protable than

those who do not, or because they generally want their

companies to act more ethically w ithout regard for prot,¹

4. Business Roundtable, Statement on the Purpose of a Corporation (last updated

July 2021), https://s3.amazonaws.com/brt.org/BRT-StatementonthePur-

poseofaCorporationJuly2021.pdf (emphasis removed).

5. Matt Levine, Money Stu: When Can Bond Investors Lie to Banks?,

B (Apr. 13, 2020), https://www.bloomberg.com/news/newslet-

ters/2020-04-13/money-stu-when-can-bond-investors-lie-to-banks (em-

phasis removed).

6. Milton Friedman, e Social Responsibility of Business Is to Increase Its Prots,

N.Y. T M. (Sept. 13, 1970).

7. Evie Liu, ESG Investing Could Quadruple by 2030, B’ (Dec. 3,

2021), https://www.barrons.com/articles/esg-investing-outlook-2030-

51638493803.

8. Larry Fink, Larry Fink’s 2022 Letter to CEOs: e Power of Capitalism, B-

R (2022), https://www.blackrock.com/corporate/investor-relations/

larry-nk-ceo-letter.

9. See Jon Hale, Sustainable Equity Funds Outperform Traditional Peers in

2020, M (Jan. 8, 2021), https://www.morningstar.com/

articles/1017056/sustainable-equity-funds-outperform-traditional-peers-

in-2020.

10. See Lauren Migaki & Andee Tagle, Understanding the Promises and

Limits of Ethical Investing, NPR (Jan. 22, 2022), https://www.npr.

org/2022/01/11/1072207126/ethical-investing-with-esg-funds.

Editors’ Note: All opinions are the author’s own and not of

any affiliate or employer.

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