11/29/2022
Understanding the Role of ESG and Stakeholder Governance Within the Framework of Fiduciary Duties
Harvard Law School Forum on Corporate Governance (11/29/22) Lipton, Martin
Over the past decade, investors, companies, and commentators have increasingly accepted and adopted stakeholder governance as the way to pursue the proper purpose of the corporation and have embraced consideration of environmental, social and governance (ESG) issues in corporate decision-making toward that end, writes Martin Lipton of Wachtell, Lipton, Rosen & Katz. "But an emerging movement opposed to any consideration, at all, of ESG factors threatens to erase the gains that have been made over the past ten years and revert to the outdated view that the purpose of a company is solely to maximize short-term shareholder profits." The objective of creating sustainable, long-term value recognizes that the purpose of forprofit corporations includes value creation for investors, but also recognizes that the interests of other constituents — namely employees, customers, suppliers, and communities — are inextricably linked to that very creation of long-term value, says Lipton. "Vindicating this concept of corporate purpose necessarily requires consideration of ESG principles — failure to do so would undermine the long-term value and success of the enterprise." In carrying out decision-making, Lipton says, "corporate law imposes on boards a fiduciary duty of care to act on a reasonably informed basis after due consideration of relevant information and appropriate deliberation. This means that directors must take actions necessary to assure themselves that they have the information required to take, or refrain from taking, action; that they devote sufficient time to the consideration of such information; and that they obtain, where helpful, advice from appropriate experts. As we set out here, there should be no doubt: Longterm value maximization as the corporation's purpose and objective is entirely consistent with the board's fiduciary duty." Lipton continues, "By ignoring or not taking into account the interests of stakeholders and ESG considerations, a corporation will not be able to sustain itself over the long term. Considering the interests of not only shareholders, but also all who are critical to the success of the company, is essential to ensuring long-term sustainability, and is consistent with the board's fiduciary obligation to inform itself of and consider all relevant information." In recent months, Lipton writes, "the concept of ESG has become fraught with political and legal implications as actors and lawmakers on both sides of the political spectrum and at all levels of government have seized on ESG and attempted to conflate it with progressive or liberal values. Asset managers are commonly the target of anti-ESG attacks, as are companies, boards, and executives. These attacks and attempts to besmirch the ESG rubric misunderstand that the concept of ESG is as simple as it is uncontroversial: ESG is merely a collection of the risks and issues that all companies must carefully consider and balance, taking into account their own specific circumstances, in seeking to achieve sustainable, long-term value. The politicization of ESG does not alter or undermine the ability of boards and companies to consider stakeholder and ESG risks and issues."
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