Category: Corporate law
Can director commitments policies help prevent overextended boards?
There is a lot going on at companies, and—you may be surprised to hear—not all of it is new regulation. There are new technologies, such as AI, global political instability and social change, not to mention ESG and cybersecurity. Many of these topics, as they affect a company, fall within the remit of the board for oversight. The energy and time necessary can be overwhelming. In this article, Director Commitments Policies, Overboarding, and Board Refreshment, proxy advisory firm Glass Lewis discusses one way to help ensure that directors have “sufficient time and energy to fulfill their duties and obligations to shareholders”: a director commitments policy. As a corollary, GL maintains, these policies can also serve to boost board refreshment, and can represent a vital measure of corporate governance.
Can companies escape the trap of politics?
We hear a lot about companies taking public positions on political issues—as well as the backlash that many experience as a result. Whether you think corporate participation in politics is a good thing or a bad thing, you might be interested in this thought-provoking paper from the University of Pennsylvania Institute for Law & Economics, How Did Corporations Get Stuck in Politics and Can They Escape?,© by Professors Jill Fisch and Jeff Schwartz (All rights reserved, 2024). In their paper, the authors observe that, while, historically, companies have long engaged in politics and lobbying, something seems quite different today. How? The difference is that companies seem to be taking public positions on any number of hot political issues, even if those issues are not connected to the conduct of their businesses. That is, while companies may take these positions “for business reasons—to appeal to their customers, employees, or investors”—these issues are not necessarily intrinsic to their business operations. The authors contend that this type of corporate behavior, which they call “corporate political posturing,” is “problematic,” creating potential risks for the company, its shareholders and for society. The authors suggest some ways for companies to depoliticize, including through coordinated “voluntary disarmament.” Certainly, some ideas to think about.
Some highlights of the 2023 PLI Securities Regulation Institute
This year’s PLI Securities Regulation Institute was a source for a lot of useful information and interesting perspectives. Panelists discussed a variety of topics, including climate disclosure (although no one shared any insights into the timing of the SEC’s final rules), proxy season issues, accounting issues, ESG and anti-ESG, and some of the most recent SEC rulemakings, such as pay versus performance, cybersecurity, buybacks and 10b5-1 plans. Some of the panels focused on these recent rulemakings echoed concerns expressed last year about the difficulty and complexity of implementation of these new rules, only this time, we also heard a few panelists questioning the rationale and effectiveness of these new mandates. What was the purpose of all this complication? Was it addressing real problems or just theoretical ones? Are investors really taking the disclosure into account? Is it all for naught? Pay versus performance, for example, was described as “a lot of work,” but, according to one of the program co-chairs, in terms of its impact, a “nothingburger.” (Was “nothingburger” the word of the week?) Aside from the agita over the need to implement the volume of complex rules, a key theme seemed to be the importance of controls and process—the need to have them, follow them and document that you followed them—as well as an intensified focus on cross-functional teams and avoiding silos. In addition, geopolitical uncertainty seems to be affecting just about everything. (For Commissioner Mark Uyeda’s perspective on the rulemaking process presented in his remarks before the Institute, see this PubCo post.) Below are just some of the takeaways, in no particular order.
NYSE proposes listing standards for a “natural asset company”—what’s that?
The NYSE has proposed to adopt new listing standards for the common equity securities of a “Natural Asset Company,” a new type of public company defined by the NYSE as “a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services.” And, “where doing so is consistent with the company’s primary purpose,” a NAC would also be required to “seek to conduct sustainable revenue-generating operations,” and “may also engage in other activities that support community well-being, provided such activities are sustainable.” In addition, NACs would be prohibited from engaging in unsustainable activities, that is, activities that “cause any material adverse impact on the condition of the natural assets under its control, and that extract resources without replenishing them.” Although existing regulatory and listing requirements would continue to apply to NACs, in many ways, the proposal contemplates something approaching a new NAC governance and reporting ecosystem, if you will, that would involve specific provisions in corporate charters, new mandatory policies (environmental and social, biodiversity, human rights, equitable benefit sharing), new prescribed responsibilities for audit committees and a new reporting framework, including mandatory “Ecological Performance Reports.” Why did the NYSE introduce this proposal? Notwithstanding all of the developments in ESG disclosure and investing (such as ESG funds), the NYSE contends that “investors still express an unmet need for efficient, pure-play exposure to nature and climate.” According to the Intrinsic Exchange Group, which pioneered the NAC concept and advises public sector and private landowners on the creation of NACs, “[b]y taking a NAC public through an IPO, the market transaction will succeed in converting the long-understood—but to-date unpriced—value of nature into financial capital. This monetization event will generate the funding needed to manage, restore, and grow healthy ecosystems around the world and bring us closer to achieving a truly sustainable, circular economy.” Will this proposal be a game changer to rescue our environment or merely a chimera? Time will tell. The proposal is open for comment for 21 days following publication in the Federal Register.
Starbucks decision to adopt DEI initiative within Board’s business judgment
In August last year, the National Center for Public Policy Research filed a complaint against Starbucks and its officers and directors, National Center for Public Policy Research v. Schultz, alleging that they caused Starbucks to adopt a group of policies that discriminate based on race in violation of a “wide array of state and federal civil rights laws.” Starbucks characterized the policies as designed to “realize its ‘commitment to Inclusion, Diversity, and Equity[.]’” Starbucks, its officers and directors moved to dismiss, and a hearing on the motion was held on August 11, 2023. At the hearing, the Federal District Court for the Eastern District of Washington granted the motion to dismiss with prejudice and closed the case. A month on, the Court’s Order has now been released. While the Order discusses the various legal bases for the dismissal, the Court’s sentiment was perhaps best summed up by its statement in the Order that “[t]his Complaint has no business being before this Court and resembles nothing more than a political platform.” Much like the recent decision of the Delaware Chancery Court in Simeone v. The Walt Disney Company, the Court concluded that “[c]ourts of law have no business involving themselves with reasonable and legal decisions made by the board of directors of public corporations.” Are we starting to see a trend with regard to board business decisions about corporate social policy?
Disney decision to speak out on issue of social significance within board’s business judgment
Boards and their advisors seeking to navigate the culture wars and their often conflicting pressures from a variety of stakeholders and outside groups may find some comfort and guidance in this recent decision from the Delaware Chancery Court in Simeone v. The Walt Disney Company. The case involved a books-and-records demand from a stockholder asserting a potential breach of fiduciary duty by Disney’s directors and officers in their determination to publicly oppose Florida’s so-called “Don’t Say Gay” bill. Originally, Disney was silent on the bill. However, following reproaches from employees and other creative partners, Disney’s board deliberated at a special meeting, and the company changed course and publicly criticized the bill. The Court declined to grant the plaintiff’s books-and-records request, concluding that the plaintiff had not provided a credible basis from which to infer wrongdoing and thus had not “demonstrated a proper purpose to inspect books and records.” Rather, the Court concluded, the Disney board had made a business decision to reverse course—“a decision that cannot provide a credible basis to suspect potential mismanagement irrespective of its outcome.” Under Delaware’s business judgment rule, directors have “significant discretion to guide corporate strategy—including on social and political issues.” Importantly, the Court confirmed that, in exercising its business judgment, a board may take into account the interests of non-stockholder corporate stakeholders where those interests are “rationally related” to building long-term value.
Commissioner Uyeda addresses shareholder proposal overload—is “private ordering” the answer?
On Wednesday, SEC Commissioner Mark Uyeda spoke to the Society for Corporate Governance 2023 National Conference on the topic of shareholder proposals under rule 14a-8, a topic on which, historically, the commissioners’ energetic back-and-forth has been reflected in Corp Fin interpretations that have literally shifted back and forth. You might think these reversals are a new thing, but Uyeda reminds us about the goings-on in 2015, when Whole Foods was first permitted to exclude, as a conflicting proposal under Rule 14a-8(i)(9), a proxy access proposal, only to have the staff reverse course shortly thereafter. (See this PubCo post, this PubCo post and this PubCo post.) “Relying on the Commission’s rules, or its staff’s positions,” he later observes, “in this area is akin to building a sand castle on the beach. Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.” However, Uyeda finds the reversals over the course of the last few years particularly problematic. In his view, the recent interpretative changes in SLB 14L have led to a surfeit of proposals the aggregate effect of which he finds to be “value-eroding.” He suggests some approaches to address the problem. Are we looking at a fundamental—some might say radical— reimagining of the shareholder proposal process?
McDonald’s court dismisses Caremark claims against directors
Here we have another in a string of McDonald’s cases—all of them arising out of workplace misconduct at McDonald’s, none even dipping its toe into employment law. First, you’ll remember, there were settled charges brought by the SEC against McDonald’s and its former CEO, Stephen Easterbrook, arising out of disclosure about the termination of Easterbrook on account of workplace misconduct. Then there was the derivative Caremark litigation for breach of fiduciary duty against David Fairhurst, who formerly served as Executive Vice President and Global Chief People Officer of McDonald’s, for consciously ignoring red flags about workplace misconduct and engaging in some pretty extensive workplace misconduct himself. Now, we have a new decision out of Delaware regarding the derivative Caremark litigation against the company’s directors alleging that they ignored red flags about the company’s culture that condoned workplace misconduct. But this case turned out to be different—VC Laster of the Delaware Chancery Court dismissed the complaint against the directors. The Court held that, in this case, the directors did not ignore the numerous red flags: the facts cited in the pleadings did “not support a reasonably conceivable claim against them for breach of the duty of oversight.” Once again, the case reinforces that high bar described by former Chief Justice Leo Strine for Caremark claims: “Caremark claims are difficult to plead and ultimately to prove out,” and constitute “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” (See this PubCo post.)
Be on the alert for California’s Climate Corporate Data Accountability bill
If you’re waiting with bated breath to find out what the SEC has in store for public companies in its final version of its climate disclosure regulations (see this PubCo post, this PubCo post and this PubCo post), you might also want to take a look at this California bill—the Climate Corporate Data Accountability Act (SB 253)—previously known as the Climate Corporate Accountability Act when it went belly up last year after sailing through one chamber of the legislature but coming up shy in the second (see this PubCo post). In fact, this year, the press release announces, the bill is part of California’s Climate Accountability Package, a “suite of bills that work together to improve transparency, standardize disclosures, align public investments with climate goals, and raise the bar on corporate action to address the climate crisis. At a time when rising anti-science sentiment is driving strong pushback against responsible business practices like risk disclosure and ESG investing,” the press release continues, “these bills leverage the power of California’s market to continue the state’s long tradition of setting the gold standard on environmental protection for the nation and the world.” If signed into law this time, the bill, which was introduced at the end of January and has a hearing scheduled in March, would mandate disclosure of GHG emissions data—Scopes 1, 2 and 3—by all U.S. business entities with total annual revenues in excess of a billion dollars that “do business in California.” The bill’s mandate would exceed, in several key respects, the requirements in the current SEC climate proposal. Whether this new bill will face the same fate as its predecessor remains to be seen.
Delaware VC Laster finds a “black swan”—a fiduciary duty of oversight for officers
In In re McDonald’s Corporation, defendant David Fairhurst, who formerly served as Executive Vice President and Global Chief People Officer of McDonald’s Corporation, contested a stockholders’ claim that he had breached his fiduciary duty of oversight by arguing that there is no fiduciary duty of oversight for officers, only for directors. VC Laster of the Delaware Chancery Court responded this way: “That observation is descriptively accurate, but it does not follow that officers do not owe oversight duties. For centuries dating back to the Roman satirist Juvenal, Europeans used the phrase ‘black swan’ as a figure of speech for something that did not exist. Then in the late eighteen century, Europeans arrived on the shores of Australia, where they found black swans. The fact that no one had seen one before did not mean that they could not or did not exist…. Framed in terms of the issue in this case, decisions recognizing director oversight duties confirm that directors owe those duties; those decisions do not rule out the possibility that officers also owe oversight duties.” With that—and a lengthy exposition—Laster confirmed that Fairhurst did indeed have a duty of oversight, much like the Caremark duties applicable to corporate directors.
You must be logged in to post a comment.