The Character of the Corporation.

Directors & Boards' fourth Character of the Corporation conference was held Dec. 6, 2022, at the Union League of Philadelphia. It featured a series of provocative conversations around "The G in ESG: What Great Governance Looks Like in an Era of Stakeholder Activism." Among the topics discussed were the purpose of a corporation, share buybacks, the SEC's disclosure agenda and geopolitical risk.

This special section includes excerpts from each of our sessions, edited and rearranged for clarity. Each session can be viewed in its entirety at our website, www.directorsandboards.com.

Lawrence Cunningham and Jeffrey Sonnenfeld Debate Corporate Purpose By Bill Hayes

On a day that featured a series of conversations highlighting the advantages and drawbacks of shareholder capitalism, one of the highlights was surely the square-off between Lawrence Cunningham and Jeffrey Sonnenfeld, who shared their visions of the purpose of a corporation, their thoughts on why stakeholder activism has made the debate so intense and the director's role in a landscape that features heightened stakeholder expectations.

TWO PERSPECTIVES ON VALUE CREATION

Cunningham, who serves as special counsel for Mayer Brown, vice chairman of the board and director for Constellation Software, director for Kelly+Partners Group Holdings Limited and emeritus professor of corporate governance at George Washington University, stressed that the purpose of the large, listed U.S. public company should center on value creation.

"Long-term value creation is the purpose of that kind of corporation. It does this by attracting investment capital, hiring personnel, creating goods and services, and selling them. The secondary purpose is a framework to allocate the value so created, and that framework is led by a board of directors whose job is oversight and strategic direction and hiring managers who execute on that strategy"

Sonnenfeld, a director of Lennar Corporation and senior associate dean for leadership studies and Lester Crown Professor in the Practice of Management at Yale School of Management, agreed that the purpose of the corporation is value creation but referred back to the root of the word "corporation" to display the business's duty to benefit more than just individual shareholders.

"It comes from the word 'corpus.' It has to do with the grouping of lots of individuals together into a common body. They want to share each other's resources, talent and finances but also pool risk so that no individual shareholder is going to be responsible for decisions made by the corporation. So the purpose of the corporation is to create value, but in a way that is different from all other entities."

STAKEHOLDER INTEREST ISN'T NEW, IT'S JUST HEIGHTENED

While it may seem that stakeholder interest in "the business of business" is new, both Sonnenfeld and Cunningham stressed that it is not. But they also agreed that the level of stakeholder engagement has heightened, with Cunningham pointing to a decline in trust in government, the rising influence of nongovernmental organizations and an uptick in social and political concerns from the COVID pandemic to the Black Lives Matter movement. He also pointed to social media as a particularly amplifying factor.

Social media can be good, but it has its downsides: confirmation loops, echo chambers and consequences that are often exaggerated. There are beliefs and claims on both sides that capitalism is now all woke or that capitalism is an oppressive means of allocating resources.

Sonnenfeld noted that the rise of ESG-related index funds and asset managers has contributed to the level of focus from stakeholders.

There are different standards of defining what's environmentally responsible between the U.S. and the Sustainability Accounting Standards Board. There are 2,000 ESG-designated funds now, and only 4,000 public companies. There's just a lot of opportunities that come along to hijack a noble cause.

THE DIRECTOR'S RESPONSIBILITY

Does shareholders' increased focus on ESG issues affect the way that directors should approach them? According to Cunningham, directors should stick to the basics to ensure they do not violate their fiduciary duties in the service of stakeholder expectations. That means remembering that stakeholder expectations don't change legal standards, that the corporations interests are placed above a director's own and that directors have a basic duty to be informed about decisions.

In this environment, I think it is important to engage with management and ask them questions. What are our stakeholders saying? How will this decision affect customers? How will this union agreement affect our employees? Becoming informed about those sorts of matters is very important.

Sonnenfeld said it is the director's responsibility to remember that disagree and Lester Crown Professor in the Practice of Management at Yale School of Managementing with a company's strategy is not a betrayal of the duty of loyalty.

"What directors need to show is that you can ask tough questions, because sometimes you can get in a lot of trouble by not doing it."

THE BOARD/CEO RELATIONSHIP

The duo also weighed in on the ideal board/ CEO relationship, especially as it relates to speaking out on social issues. While stating that every business's culture is different, Cunningham said that "the ideal structure is a collaborative, collegial, open dialogue where there should be meetings between the CEO and the board" on complicated social issues.

"The CEO should be given enormous latitude to speak on most traditional issues," Cunningham said. He included relationships with employees, customers, shareholders and charities on that list.

While he believes topics such as recommending candidates for office or endorsing or opposing specific political parties or agendas should be off limits for boards and CEOs, Cunningham acknowledged that in today's atmosphere, "silence can be as dangerous as taking a position."

I think the key thing from a governance perspective is for the CEO and the board to be aligned and to converse openly.

To Sonnenfeld, the board/CEO relationship cannot be successful if it is not a partnership.

"There are some board members who think they will prove themselves more diligent by being more hostile, and that that is what good governance is. But if the CEO and the board can't forge a partnership, there's a bigger issue there about the staffing on one or both sides of the equation. Good governance, unless it's in a crisis, should not be adversarial or hostile." Cunningham concurred, adding that "directors today should appreciate that the topics we are grappling with are not new, but have bedeviled boards and managers for a century."

LAWRENCE CUNNINGHAM

Special counsel, Mayer Brown; director, Constellation Software Inc., Kelly+Partners Group Holdings Limited; founder and managing partner, Quality Shareholders Group

JEFFREY SONNENFELD

Director, Lennar Corporation; senior associate dean for leadership studies

Keynote Conversation on The Delaware Court of Chancery and the Board

SPEAKERS: ANDRE G. BOUCHARD, former chancellor of the Delaware Court of Chancery;

DON DELVES, executive compensation, North America practice leader, Willis Towers Watson

DELVES: How does the court approach situations when evaluating a stockholder challenge to board action?

BOUCHARD: I would look at it from the perspective of four different concepts. One is, what are the fundamental duties of directors? Second, what is the standard of conduct associated with those duties? Third, what are the standards of review a court applies to look at board actions and transactions? The last concept involves considerations of personal...