From Stockholders To Stakeholders

Thanks to Scott, Sarah and Francisco for their recent and thoughtful piece on the growing dichotomy between ESG and directors' duties. The article reminds me of the debate handily summarized by the title of this piece which is a challenge to the 1970's theory of Milton Friedman, that a corporate's "greatest responsibility lies in the satisfaction of the shareholders", in other words, a director's sole duty is to maximise profit. (Which is perhaps how we ended up with the Wolf of Wall Street...)

Statutory duties

As highlighted in the article, the legal duties of directors in the UK, Australia and Delaware are clearly not limited to the generation of profit and are arguably extending to climate related risks and governance.

Essex Court

Essex Court Chambers has also recently commented on the broadening interpretation of directors' duties, and the role that 'soft law' is playing in the development of the interpretation of the statutory duties of directors in England and Wales to use reasonable care, skill and diligence (section 174 Companies Act 2006), and to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (section 172). As the body of soft law such as the World Economic Forum's 2019 guidance on climate governance becomes more readily accepted and mainstream their recommendation that boards ensure the "integration of climate considerations into [a board's] structure and committees" (Principle 3), then it is more likely that as the heightened risk of ESG litigation continues then courts will be persuaded to adopt these standards in the interpretation of statutory duties.

Chief Value Officer?

In an interesting 2019 lecture, Lord Sales of the Supreme Court suggests that future reform could include dedicating a director, or a committee as a board's focal point for environmental responsibility. Whilst this is a procedural reform (not a substantive change to the duties), it does perhaps show the direction of travel.

The history of corporate law is littered with responses to fraud, risk and catastrophe; financial reporting, standards and the role of a CFO developed in response to this and to maximise Friedman's theory for profit. But as the legal landscape shifts, and as non-financial disclosure, risk and assessment becomes mandatory not just for large corporates, but for all, so perhaps we will see a new role developing on the boards combining the responsibilities of those focused on finance and sustainability - arise the new Chief Value Officer; focused on financial and non-financial performance and risk for stockholder and the stakeholders equally.

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