Sustainability and the law is a big topic.
Until founding Clear Strategy Co. I practiced law for more than 30 years. I started doing sustainability and ESG work as the Chief Legal and Compliance Officer of a US public company.
At the summer school program entitled Transnational Commercial Law & ESG Sustainability, sponsored this summer in Verona, Italy, by the Center for Legal Education of the University of Pittsburgh School of Law, and the University of Verona Department of Law, I talked about the CLO and ESG. I opened by observing that my esteemed co-presenters had talked about ESG or sustainability and another established body of law, such as contract law, transnational commercial law, litigation, and human rights law. It was clear to me that sustainability law is an emerging area where there is an opportunity to shape a cohesive legal corpus. As this body of law emerges, the leading edge will be cut by legislatures and the courts, but there is likewise an opportunity for practicing lawyers, academics, and chief legal officers and their teams to shape the law.
Where to start?
Important disclaimer: this is not legal advice. These are the observations and thoughts of a 30+-year legal veteran, but they are not legal advice.
Considerations of ESG or sustainability and the law start at the company’s inception with the question, what is the company’s purpose?
Corporate purpose is a foundational issue for a corporation. Why does the corporation exist? For whose benefit does it exist? The latter is a question that, traditionally in the US, had been answered expansively. The corporation exists to produce a financial return for investors, but it also benefits employees, customers, and the communities and governments that permit the business activity to take place. In the 1970s in the US, however, we saw a swing to the shareholder primacy view espoused by the economist Milton Friedman, and companies today still find themselves working within this restrictive view of who should benefit from corporate activity.
How does corporate purpose relate to corporate law? One of a corporate director’s most important fiduciary duties is the duty of loyalty, which is codified in corporate law statutes. To whom is the duty owed? To shareholders? Other stakeholders?
In Delaware, directors have a fiduciary duty to manage the corporation in the best interests of stockholders. There is no express statutory authority for directors to consider the impact of their decisions on a wide range of constituencies. If a company exists to benefit shareholders either first, or exclusively, then the object of the board of directors’ loyalty is the shareholder group. If their decisions do not respect the primacy of the shareholder, the Board’s decisions can be legally challenged by shareholders.
In a February 2020 article on Directors’ Fiduciary Duties: Back to Delaware Law Basics, Marc S. Gerber, Edward B. Micheletti Peter A. Atkins, of the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, a leading US-based corporate law firm, wrote that this “does not preclude directors from considering the interests of other constituencies in determining what is in the company’s and stockholders’ best interest.” But you do look first to the stockholders’ interest in making a decision.
In Pennsylvania, where I was licensed to practice, and which is the jurisdiction of organization of the company where I served as CLO, corporate law does not enshrine shareholder primacy. The Pennsylvania Business Corporation Law states, “A director of a business corporation shall stand in a fiduciary relation to the corporation and shall perform his duties … in good faith, … in the best interests of the corporation … .”
This raises the question, who is the corporation? Pennsylvania corporate law answers this indirectly by stating that, “In discharging the duties … directors may … consider … [t]he effects of any action upon … groups affected by such action, including shareholders, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.
In both Delaware and Pennsylvania there is an alternative to the traditional business corporation called a public benefit corporation. These are business corporations organized for profit, but with a stated corporate purpose of creating a general or a specific public benefit. A benefit corporation offers entrepreneurs and investors the option to build, and invest in, businesses that operate in a socially and environmentally responsible manner.
A corporate lawyer, then, is called upon to advise the client from the corporation’s inception on a question that is fundamental to ESG: who are the stakeholders, and who benefits?
Is that the extent of it? Definitely not. There are many other areas in which the CLO and the outside lawyer have important roles to play in the realm of ESG and sustainability. More on those in upcoming posts.
For now, if you are thinking of forming a new business, or converting a sole proprietorship, limited liability company, or partnership into a corporation, ask your lawyer for advice on corporate purpose in your state of incorporation. Once you are settled on corporate form and purpose, contact Clear Strategy to chart your strategy for a sustainable business, one that endures.
Jo Anne Schwendinger
Clear Strategy Co.
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