Weighing ESG Against Directors' Fiduciary Duty: A focus on environmental, social and governance benefits should be framed by the lens of business benefits.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

The directors of a Delaware corporation have a fiduciary duty to manage the corporation, in good faith, in the best interests of the stockholders. Under Delaware law, this means, in general, that the board has a fiduciary obligation to maximize the profits of the firm for the benefit of its owners.

Of course, this does not mean that short-term profits outweigh all other considerations. Directors can, and should, consider both short- and long-term interests of the shareholders. (The principal exception, which is recognized in Delaware but not in certain other jurisdictions, is when the sale or breakup of the company is inevitable, in which case there really is no longer a long-term interest to consider.) As a consequence, boards can take into account all the factors that reasonably could contribute to the long-term health of the business, including impacts on employees, local communities etc.

Other jurisdictions take a more expansive view, looking beyond just share owners to other constituencies.

For example, in Pennsylvania, the board's obligations run to the corporation, not the shareholders, and a director is required to perform his (or her) duties "in good faith, in a manner he reasonably believes to be in the best interests of the corporation ..."

Since a corporation is an inanimate concept, and cannot be said to really have any particular interests at all, the Pennsylvania corporation law helpfully adds a laundry list of stakeholders whom the board can consider when deciding whether an act is, or is not, in the corporation's "best interests." These include, among others, employees, customers, suppliers, creditors and communities where the business operates. But, in Pennsylvania, unlike Delaware, the interests of these other constituencies are not subordinate to the interests of the shareholders, and so can outweigh a focus on the shareholders.

But what if boards want to increase their focus on long- and short-term environmental, social and governance impacts of the corporation?

The directors' duty to act in the best interests of the corporation (or its shareholders/stakeholders) is known as the duty of loyalty. Directors also have a fiduciary duty of care, to act on an informed basis and with reasonable care. The directors have the benefit of almost bulletproof protections against claims that they have breached their duty of care. These protections are primarily the strong presumption of the business judgement rule--that the actions of...