Being a “good corporate citizen”: how can ESG be integrated with corporate compliance and board oversight functions?
In light of accelerating concerns about climate change and sustainability, economic inequality, worker safety and racial inequity, companies have faced increasing calls to answer to a variety of stakeholders—stakeholders other than shareholders. These concerns are often collected under the heading of environmental, social and governance issues, sometimes adding in “employees” as a separate “E” category. How should companies that aim to be good corporate citizens identify relevant components of EESG? How does EESG align with existing Caremark compliance efforts? How should we think about incorporating EESG oversight into the board’s organizational structure? Is this another job for the already burdened audit committee? This article, Caremark and ESG, Perfect Together: A Practical Approach to Implementing an Integrated, Efficient, and Effective Caremark and EESG Strategy, co-authored by former Delaware Chief Justice Leo Strine, observes that “boards and management teams are struggling to situate EESG within their existing reporting and committee framework and figure out how to meet the demand for greater accountability to society while not falling short in other areas.” Strine and his co-authors offer a framework for doing just that.
In In re The Boeing Company Derivative Litigation, Vice Chancellor Morgan Zurn of the Delaware Court of Chancery opened her opinion this way:
“A 737 MAX airplane manufactured by The Boeing Company…crashed in October 2018, killing everyone onboard; a second one crashed in March 2019, to the same result. Those tragedies have led to numerous investigations and proceedings in multiple regulatory and judicial arenas to find out what went wrong and who is responsible. Those investigations have revealed that the 737 MAX tended to pitch up due to its engine placement; that a new software program designed to adjust the plane downward depended on a single faulty sensor and therefore activated too readily; and that the software program was insufficiently explained to pilots and regulators. In both crashes, the software directed the plane down. The primary victims of the crashes are, of course, the deceased, their families, and their loved ones. While it may seem callous in the face of their losses, corporate law recognizes another set of victims: Boeing as an enterprise, and its stockholders.”
Do the directors bear any responsibility for these losses? The question before the Court in this derivative litigation was whether the plaintiff stockholders—New York and Colorado public pension funds—had adequately alleged, under In re Caremark International Inc. Derivative Litigation and Marchand v. Barnhill, that, as a result of the directors’ “complete failure to establish a reporting system for airplane safety,” or “their turning a blind eye to a red flag representing airplane safety problems,” the board faced a “substantial likelihood of liability for Boeing’s losses.” In a 103-page opinion, the Court concluded that the answer was yes—on both bases. (Other claims regarding the company’s officers and the board’s handling of the CEO’s retirement and compensation were dismissed.) It’s worth noting that this case is one of several Caremark claims in recent years to survive dismissal (see, e.g., this PubCo post). In Marchand, then-Chief Justice Strine remarked that Caremark presents a very high hurdle, observing that “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.) In light of this series of decisions, you have to wonder—at least with regard to matters that involve “essential and mission-critical” risk and safety issues—if that’s still the case.
Delaware Supreme Court allows Caremark duty of loyalty claims against directors to survive dismissal motion
In Marchand v. Barnhill (June 18, 2019), soon-to-be-retired Chief Justice Strine, writing for the Delaware Supreme Court, started out his analysis with the recognition that “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.” That’s a rather high bar. What does it take to plead a Caremark case that can survive a motion to dismiss? Marchand provides an illustration—and a warning that directors should be proactive in conducting risk oversight and could face liability if they fail to “make a good faith effort to implement an oversight system and then monitor it.”