The Legal Rules of the Road

• Pages: 89-103
• Author: Michael P. Vandenbergh,Sarah E. Light,James Salzman

89

Chapter 5

THE LEGAL RULES OF THE ROAD

Imagine that you are the Chief Executive Officer of a publicly

traded firm that sells consumer products. Your Board of Directors

has agreed with your assessment that it is in the firm’s best interest

to make a public pledge both to achieve “net zero” emissions in the

firm’s operations and its supply chain by 2050, and to reduce the

firm’s other environmental impacts. And you also agree that it is the

right thing to do for the environment. Some of the key ingredients for

the firm’s best selling products are under stress from extreme

weather events and droughts, so you know it is time to be forward -

thinking about protecting the inputs to the firm’s products. You

believe, based on research, that consumers are likely to be willing to

pay a “green premium” for some of these more environmentally

friendly products. And you know that your employees will be happy

with this change, as they have signed petitions seeking a more

environmentally conscious path for the firm.

This, of course, requires more than just a board vote. It will

require the firm to change the formulation of some of its products like

laundry detergent to replace some of the chemicals in your products

with more environmentally friendly alternatives. It will require

redesigning packaging to reduce plastic waste. These will both

require some upfront research and development investments. And

the net zero pledge will require the firm to purchase substantial

amounts of renewable energy to power its operations moving

forward. Some of these short-term costs to the firm may temporarily

depress the stock price, even if they will pay out financially in the

longer term or increase the firm’s resilience in the face of future

changes to the climate.

What if a frustrated shareholder sues the firm, claiming that the

officers and directors failed to maximize the short-term value of the

firm, as reflected in its stock price? Would that suit succeed? What

are the officers’ and managers’ duties to the shareholders? What

about other stakeholders of the firm like its customers and

employees? Could all of the firms in this consumer products space

decide collectively to take the same steps to stop using a particular

ingredient or to require the use of recycled plastic in their packaging?

Could they reach an agreement to develop an industry “code of

conduct” on the formulation of common products or the use of

renewable energy to power their facilities? And, finally, does the firm

have any obligation to disclose the fact that it is concerned about