Energy & Sustainability Legal Feature - October 2018

Stakeholders’ Desire for Sustainability Presents Opportunities and Challenges for Boards

This feature was originally published on the official blog of the National Association of Corporate Directors and reposted on the Mintz Energy & Sustainability Viewpoints page.

It is encouraging to live in a time where society is increasingly insisting that corporations generate and measure social impact alongside profit. Not only is this a positive development from a moral perspective, but it’s also good business. In the report, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” for example, Oxford University and Arabesque Asset Management establish that corporations that “incorporate sustainability considerations into decision-making processes . . . show better operational performance and are less risky.”

Mainstream financial and business leaders appear to, in large part, agree. In 2017, Larry Fink, chair of Blackrock, the world’s largest asset manager, sent a letter to CEOs stating that, “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” Investors are following suit, with 84% applying or considering Environmental, Social and Governance (ESG) criteria.

As the sustainability movement grows, so too do the ambiguities under which boards of directors govern. Boards are bound by fiduciary duties, including the duty of loyalty, which requires that a board acts in good faith and in the best interest of the corporation. Historically, the “best of the corporation” was interpreted to mean maximizing profits solely for the shareholder. Many regulators, academics, politicians, and investors are now challenging this concept, contending that a corporation is best served when it incorporates “more nuanced and tempered approaches to creating shareholder value“ and considers the interests of a broader set of stakeholders, such as employees, customers, and communities. Boards can lead the way by partnering with experienced, creative legal counsel to balance a multitude of considerations.

• Legal Structure. Boards should consider the corporation’s legal structure so, when appropriate, all stakeholder interests are carefully weighed and explicitly memorialized. Delaware and 34 other jurisdictions have, for example, adopted a new type of corporate form, the Public Benefit Corporation (PBC), a for-profit entity that helps corporations explicitly align shareholder profits and social impact. Other corporate forms, such as Limited Liability Companies (LLCs) or C-Corporations, can also support a mission-driven corporation’s objectives with adjustments to the charter, operating agreement, or other governing documents.
• Policies and Procedures. Boards should, when appropriate, consider various actions to integrate stakeholders into the corporate governance structure, including strategic retreats with management and relevant communities; board observer seats; and transparent board policies regarding diversity, term limits, skills, committees, and selection/evaluation.
• Measuring Impact. Boards of mission-driven corporations should measure and report impact. Several helpful resources include the UN Global Compact, the United Nations backed Principals for Responsible Investment (UN PRI), the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP) and the Sustainability Accounting Standards Board (SASB). In addition, companies like Arabesque Asset Management are now helping corporations — in Arabesque’s case, globally listed corporations — evaluate their sustainability performance using self-learning quantitative models and big data.
• Planning Ahead. Perhaps most importantly, boards should plan for inflection points — like joint ventures, large investments, initial public offerings (IPOs) and mergers or acquisitions (M&A) — that are likely to create tension between shareholders and other stakeholders. In the IPO context, for example, the SASB is lobbying the Securities and Exchange Commission (SEC) to incorporate sustainability standards into SEC rules for publicly held companies. In the M&A context, PBCs can only merge or consolidate with another entity if either the surviving company’s certificate of incorporation identifies a similar public benefit or two-thirds of the PBC’s outstanding voting shares approve a new public benefit. Attention to these issues is critical, as buyers are integrating ESG considerations into their diligence process and ESG compatible deals are outperforming ESG incompatible deals by an average of 21% on a five-year cumulative return basis.

The sustainability movement is exciting, but complicated and still developing. For example, on the one hand, BNP Paribas, JPMorgan, and Citibank offered Danone significantly lower borrowing costs on a $2 billion credit facility to the extent that Danone’s business units could demonstrate they were generating positive social impact. On the other hand, the US Department of Labor issued a bulletin that creates roadblocks for ERISA plan fiduciaries that want to consider ESG factors in their investment decisions. But with experienced counsel, boards can navigate this uncertainty and successfully guide corporations to long-term profits and impact.

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