Director Engagement: Necessary for ESG Success

Date01 August 2022
AuthorTodd Phillips
by Todd Phillips
Todd Phillips is Director, Financial Regulation and Corporate Governance at the Center for American Progress.
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.
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),
poseofaCorporationJuly2021.pdf (emphasis removed).
5. Matt Levine, Money Stu: When Can Bond Investors Lie to Banks?,
B (Apr. 13, 2020),
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,
8. Larry Fink, Larry Fink’s 2022 Letter to CEOs: e Power of Capitalism, B-
R (2022),
9. See Jon Hale, Sustainable Equity Funds Outperform Traditional Peers in
2020, M (Jan. 8, 2021),
10. See Lauren Migaki & Andee Tagle, Understanding the Promises and
Limits of Ethical Investing, NPR (Jan. 22, 2022), https://www.npr.
Editors’ Note: All opinions are the author’s own and not of
any affiliate or employer.
Copyright © 2022 Environmental Law Institute®, Washington, DC. Reprinted with permission from ELR®,, 1-800-433-5120.

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