United States: A Guidebook To Boardroom Governance Issues

Introduction

In recent years, we have seen boards and management increasingly grapple with a recurring set of governance issues in the boardroom. This publication is intended to distill the most prevalent issues in one place and provide our clients with a useful and practical overview of the state of the law and appropriate ways to address complex governance problems. This publication is designed to be valuable both to public and private companies, and various governance issues overlap across those spaces, although certainly some of these issues will take on greater prominence depending on whether a company is public or private. There are other important adjacent topics not covered in this publication—for example, the influence of stockholder activism or the role of proxy advisory firms. Our focus here is on the most sensitive issues that arise internally within the boardroom, to help directors and management run the affairs of the corporation responsibly and limit their own exposure in the process.

The Purpose of the Corporation and the Role of Stakeholders

Corporate purpose, along with the related question of whether and how a board of directors should consider non-stockholder interests—such as environmental, social, and governance ("ESG") issues—has become a major source of debate among policymakers, lawyers, academics, institutional investors, and even jurists in recent years. This debate challenges the dominance of stockholder primacy ideology, which has effectively constrained corporate boards since at least the mid-1980s.

Under the stockholder primacy framework, directors have to justify all actions as benefitting stockholders. Although a board can select a time frame for those benefits to be achieved, the fiduciary duties of directors run to stockholders and the ultimate purpose of those duties is to maximize stockholder value.

Now many business leaders and investors are calling for a change or reconceptualization in corporate governance ideology. This movement would encourage, or even require, directors to consider all corporate stakeholders when making their decisions. For example, on August 19, 2019, the Business Roundtable issued a new statement arguing that the purpose of the corporation must be to "create value for all" of the company's stakeholders, not just serve stockholders. Delaware Supreme Court Chief Justice Leo Strine has also called on corporate boards to focus on "creating quality jobs in a way that is environmentally responsible, fair to consumers and sustainable," rather than simply producing returns to stockholders.

Leading institutional investors have also entered this debate, encouraging companies to consider broader stakeholder interests. BlackRock CEO Larry Fink is often credited as one of the leaders in this movement, as his letters to CEOs over the last several years have called for a "new model of corporate governance." Under this model, BlackRock urged corporate leaders and boards to focus on long-term strategy, including thinking about how corporate strategy impacts "broad structural trends" in the economy, from wage growth and income inequality to climate change and rising automation. Similarly, Vanguard and State Street, the second and third largest institutional investors as measured by assets under management, have been outspoken on ESG issues, pushing directors to consider the long-term interests of all corporate stakeholders when making decisions.

Such statements dovetail with certain other trends. In 2013, the Delaware statute was amended to permit Delaware corporations to choose to become public benefit corporations—with the board of such a corporation being required to balance stockholders' pecuniary interests, a specified public benefit purpose, and the interests of those materially affected by the corporation's conduct. We have seen some uptick in interest within our client base on this form of organization. We are also seeing more companies explore the possibility of becoming certified as a B Corporation, which requires considerable commitment to a diversity of interests and considerations.

While these pronouncements and developments are significant, the practical question for directors of a traditional Delaware corporation is what impact they will have on a board's ability to take action that the board reasonably believes is in the best interests of corporate stakeholders other than stockholders. To squarely present a hypothetical issue, can a board of a traditional Delaware corporation defend a decision not to outsource jobs and pay higher wages to reduce income inequality, while openly admitting that such policies will actually reduce stockholder value by reducing corporate profits?

Sticking to the hypothetical—and in particular not taking the easy way out by justifying the board's decision on the basis that in the long-term the stockholders will benefit because the company will get better employees—Delaware law presents some complexities on that issue. Indeed, much of corporate law since at least the mid-1980s and arguably long before then is based upon the concept that the primary duty of directors of a for-profit corporation is to promote the corporation for the benefit of its stockholders. Although the business judgment rule gives directors considerable discretion to make decisions that can be justified by benefitting the long-term interests of stockholders, the general legal consensus, at least in Delaware, remains that board actions still must ultimately further stockholder value.

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