Fifty years ago, Milton Friedman in the New York Times magazine proclaimed that the social responsibility of business is to increase its profits. Directors have the duty to do what is in the interests of their masters, the shareholders, to make as much profit as possible. Friedman was hostile to the New Deal and European models of social democracy and urged business to use its muscle to reduce the effectiveness of unions, blunt environmental and consumer protection measures, and defang antitrust law. He sought to reduce consideration of human concerns within the corporate boardroom and legal requirements on business to treat workers, consumers, and society fairly.
Over the last 50 years, Friedman’s views became increasingly influential in the U.S. As a result, the power of the stock market and wealthy elites soared and consideration of the interests of workers, the environment, and consumers declined. Profound economic insecurity and inequality, a slow response to climate change, and undermined public institutions resulted. Using their wealth and power in the pursuit of profits, corporations led the way in loosening the external constraints that protected workers and other stakeholders against overreaching.
Under the dominant Friedman paradigm, corporations were constantly harried by all the mechanisms that shareholders had available—shareholder resolutions, takeovers, and hedge fund activism—to keep them narrowly focused on stockholder returns. And pushed by institutional investors, executive remuneration systems were increasingly focused on total stock returns. By making corporations the playthings of the stock market, it became steadily harder for corporations to operate in an enlightened way that reflected the real interests of their human investors in sustainable growth, fair treatment of workers, and protection of the environment.
Half a century later, it is clear that this narrow, stockholder-centered view of corporations has cost society severely. Well before the COVID-19 pandemic, the single-minded focus of business on profits was criticized for causing the degradation of nature and biodiversity, contributing to global warming, stagnating wages, and exacerbating economic inequality. The result is best exemplified by the drastic shift in gain sharing away from workers toward corporate elites, with stockholders and top management eating more of the economic pie.
Corporate America understood the threat that this way of thinking was having on the social compact and reacted through the 2019 corporate purpose statement of the Business Roundtable, emphasizing responsibility to stakeholders as well as shareholders. But the failure of many of the signatories to protect their stakeholders during the coronavirus pandemic has prompted cynicism about the original intentions of those signing the document, as well as their subsequent actions.
Stockholder advocates are right when then they claim that purpose statements on their own achieve little: Calling for corporate executives who answer to only one powerful constituency—stockholders in the form of highly assertive institutional investors—and have no legal duty to other stakeholders to run their corporations in a way that is fair to all stakeholders is not only ineffectual, it is naive and intellectually incoherent.
What is required is to match commitment to broader responsibility of corporations to society with a power structure that backs it up. That is what has been missing. Corporate law in the U.S. leaves it to directors and managers subject to potent stockholder power to give weight to other stakeholders. In principle, corporations can commit to purposes beyond profit and their stakeholders, but only if their powerful investors allow them to do so. Ultimately, because the law is permissive, it is in fact highly restrictive of corporations acting fairly for all their stakeholders because it hands authority to investors and financial markets for corporate control.
Absent any effective mechanism for encouraging adherence to the Roundtable statement, the system is stacked against those who attempt to do so. There is no requirement on corporations to look after their stakeholders and for the most part they do not, because if they did, they would incur the wrath of their shareholders. That was illustrated all too clearly by the immediate knee-jerk response of the Council of Institutional Investors to the Roundtable declaration last year, which expressed its disapproval by stating that the Roundtable had failed to recognize shareholders as owners as well as providers of capital, and that “accountability to everyone means accountability to no one.”
If the Roundtable is serious about shifting from shareholder primacy to purposeful business, two things need to happen. One is that the promise of the New Deal needs to be renewed, and protections for workers, the environment, and consumers in the U.S. need to be brought closer to the standards set in places like Germany and Scandinavia.
But to do that first thing, a second thing is necessary. Changes within company law itself must occur, so that corporations are better positioned to support the restoration of that framework and govern themselves internally in a manner that respects their workers and society. Changing the power structure within corporate law itself—to require companies to give fair consideration to stakeholders and temper their need to put profit above all other values—will also limit the ability and incentives for companies to weaken regulations that protect workers, consumers, and society more generally.
To make this change, corporate purpose has to be enshrined in the heart of corporate law as an expression of the broader responsibility of corporations to society and the duty of directors to ensure this. Laws already on the books of many states in the U.S. do exactly that by authorizing the public benefit corporation (PBC). A PBC has an obligation to state a public purpose beyond profit, to fulfill that purpose as part of the responsibilities of its directors, and to be accountable for so doing. This model is meaningfully distinct from the constituency statutes in some states that seek to strengthen stakeholder interests, but that stakeholder advocates condemn as ineffectual. PBCs have an affirmative duty to be good corporate citizens and to treat all stakeholders with respect. Such requirements are mandatory and meaningful, while constituency statutes are mushy.
The PBC model is growing in importance and is embraced by many younger entrepreneurs committed to the idea that making money in a way that is fair to everyone is the responsible path forward. But the model’s ultimate success depends on longstanding corporations moving to adopt it.
Even in the wake of the Roundtable’s high-minded statement, that has not yet happened, and for good reason. Although corporations can opt in to become a PBC, there is no obligation on them to do so and they need the support of their shareholders. It is relatively easy for founder-owned companies or companies with a relatively low number of stockholders to adopt PBC forms if their owners are so inclined. It is much tougher to obtain the approval of a dispersed group of institutional investors who are accountable to an even more dispersed group of individual investors. There is a serious coordination problem of achieving reform in existing corporations.
That is why the law needs to change. Instead of being an opt-in alternative to shareholder primacy, the PBC should be the universal standard for societally important corporations, which should be defined as ones with over $1 billion of revenues, as suggested by Sen. Elizabeth Warren. In the U.S., this would be done most effectively by corporations becoming PBCs under state law. The magic of the U.S. system has rested in large part on cooperation between the federal government and states, which provides society with the best blend of national standards and nimble implementation. This approach would build on that.
Corporate shareholders and directors enjoy substantial advantages and protections through U.S. law that are not extended to those who run their own businesses. In return for offering these privileges, society can reasonably expect to benefit, not suffer, from what corporations do. Making responsibility in society a duty in corporate law will reestablish the legitimacy of incorporation.
There are three pillars to this. The first is that corporations must be responsible corporate citizens, treating their workers and other stakeholders fairly, and avoiding externalities, such as carbon emissions, that cause unreasonable or disproportionate harm to others. The second is that corporations should seek to make profit by benefiting others. The third is that they should be able to demonstrate that they fulfill both criteria by measuring and reporting their performances against them.
The PBC model embraces all three elements and puts legal, and thus market, force behind them. Corporate managers, like most of us, take obligatory duties seriously. If they don’t, the PBC model allows for courts to issue orders, such as injunctions, holding corporations to their stakeholder and societal obligations. In addition, the PBC model requires fairness to all stakeholders at all stages of a corporation’s life, even when it is sold. The PBC model shifts power to socially responsible investment and index funds that focus on the long term and cannot gain from unsustainable approaches to growth that harm society.
Our proposal to amend corporate law to ensure responsible corporate citizenship will prompt a predictable outcry from vested interests and traditional academic quarters, claiming that it will be unworkable, devastating for entrepreneurship and innovation, undermine a capitalist system that has been an engine for growth and prosperity, and threaten jobs, pensions, and investment around the world. If putting the purpose of a business at the heart of corporate law does all of that, one might well wonder why we invented the corporation in the first place.
Of course, it will do exactly the opposite. Putting purpose into law will simplify, not complicate, the running of businesses by aligning what the law wants them to do with the reason why they are created. It will be a source of entrepreneurship, innovation, and inspiration to find solutions to problems that individuals, societies, and the natural world face. It will make markets and the capitalist system function better by rewarding positive contributions to well-being and prosperity, not wealth transfers at the expense of others. It will create meaningful, fulfilling jobs, support employees in employment and retirement, and encourage investment in activities that generate wealth for all.
We are calling for the universal adoption of the PBC for large corporations. We do so to save our capitalist system and corporations from the devastating consequences of their current approaches, and for the sake of our children, our societies, and the natural world.
Les négociations internationales sur la taxation du numérique, pomme de discorde récurrente entre Washington et Paris, se retrouvent dans l’impasse après la « pause » annoncée par les États-Unis, au risque de déclencher une guerre commerciale comme le craint l’OCDE.
Pour rappel, dans le cadre de ses recherches, TaxCOOP a analysé les documents constitutifs de plus de 190 pays à la recherche de dispositions fiscales créant l’obligation pour toute personne de payer sa « juste part » d’impôt. Il appert que les constitutions de trente-huit pays contiennent des dispositions à cet effet. Cet important constat soulève la question suivante : l’évitement fiscal est-il vraiment légal ou pourrait-il plutôt être inconstitutionnel? Ces dispositions fiscales inscrites au sein des documents considérés comme première source du droit pourraient-elles limiter l’utilisation de stratagèmes fiscaux et ainsi assurer que l’ensemble des contribuables paient leur « juste part »?
Business, and the dominant legal form of business, that is, the corporation, must be involved in the transition to sustainability, if we are to succeed in securing a safe and just space for humanity. The corporate board has a crucial role in determining the strategy and the direction of the corporation. However, currently, the function of the corporate board is constrained through the social norm of shareholder primacy, reinforced through the intermediary structures of capital markets. This article argues that an EU law reform is key to integrating sustainability into mainstream corporate governance, into the corporate purpose and the core duties of the corporate board, to change corporations from within. While previous attempts at harmonizing core corporate law at the EU level have failed, there are now several drivers for reform that may facilitate a change, including the EU Commission’s increased emphasis on sustainability. Drawing on this momentum, this article presents a proposal to reform corporate purpose and duties of the board, based on the results of the EU-funded research project, Sustainable Market Actors for Responsible Trade (SMART, 2016–2020).
Bel article de Vanessa Serret et Mohamed Khemissi dans The conversation (27 juillet 2020) : « Rémunération des dirigeants : la transparence ne fait pas tout ». Cet article revient sur le ratio d’équité : non seulement son utilité, mais encore son niveau (20 ? 100 ?…)
Le ratio d’équité apprécie l’écart entre la rémunération de chaque dirigeant et le salaire (moyen et médian) des salariés à temps plein de son entreprise. Il est prévu un suivi de l’évolution de ce ratio au cours des cinq derniers exercices et sa mise en perspective avec la performance financière de la société. Ces comparaisons renseignent sur la dynamique du partage de la création de valeur entre le dirigeant et les salariés.
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Un premier état des lieux
Sur la base des rémunérations versées en 2019 par les entreprises composant l’indice boursier du CAC 40, les patrons français ont perçu un salaire moyen de 5 millions d’euros, soit une baisse de 9,1 % par rapport à 2018.
Évolution du ratio d’équité par rapport à la rémunération moyenne (bleu) et médiane (orange) des salariés de 2015 à 2019. auteurs
Ce chiffre représente 53 fois la rémunération moyenne de leurs employés (72 fois la rémunération médiane) : un ratio acceptable, selon l’agence de conseil en vote Proxinvest. En effet, selon cette agence, et afin de garantir la cohésion sociale au sein de l’entreprise, le ratio d’équité ne doit pas dépasser 100 (par rapport à la rémunération moyenne des salariés).
Deux dirigeants s’attribuent néanmoins des rémunérations qui dépassent le maximum socialement tolérable à savoir Bernard Charlès, vice-président du conseil d’administration et directeur général de Dassault Systèmes et Paul Hudson, directeur général de Sanofi avec un ratio d’équité qui s’établit respectivement de 268 et de 107.
Notons également que pour les deux sociétés publiques appartenant à l’indice boursier du CAC 40, le ratio d’équité dépasse le plafond de 20 (35 pour Engie et 38 pour Orange) fixé par le décret n° 2012-915 du 26 juillet 2012, relatif au contrôle de l’État sur les rémunérations des dirigeants d’entreprises publiques.
Excellente lecture ce matin de ce billet du Harvard Law School Forum on Corporate Governance : « Legal Liability for ESG Disclosures » (de Connor Kuratek, Joseph A. Hall et Betty M. Huber, 3 août 2020). Dans cette publication, vous trouverez non seulement une belle synthèse des référentiels actuels, mais aussi une réflexion sur les conséquences attachées à la mauvaise divulgation d »information.
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3. Legal Liability Considerations
Notwithstanding the SEC’s position that it will not—at this time—mandate additional climate or ESG disclosure, companies must still be mindful of the potential legal risks and litigation costs that may be associated with making these disclosures voluntarily. Although the federal securities laws generally do not require the disclosure of ESG data except in limited instances, potential liability may arise from making ESG-related disclosures that are materially misleading or false. In addition, the anti-fraud provisions of the federal securities laws apply not only to SEC filings, but also extend to less formal communications such as citizenship reports, press releases and websites. Lastly, in addition to potential liability stemming from federal securities laws, potential liability could arise from other statutes and regulations, such as federal and state consumer protection laws.
A. Federal Securities Laws
When they arise, claims relating to a company’s ESG disclosure are generally brought under Section 11 of the Securities Act of 1933, which covers material misstatements and omissions in securities offering documents, and under Section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5, the principal anti-fraud provisions. To date, claims brought under these two provisions have been largely unsuccessful. Cases that have survived the motion to dismiss include statements relating to cybersecurity (which many commentators view as falling under the “S” or “G” of ESG), an oil company’s safety measures, mine safety and internal financial integrity controls found in the company’s sustainability report, website, SEC filings and/or investor presentations.
Interestingly, courts have also found in favor of plaintiffs alleging rule 10b-5 violations for statements made in a company’s code of conduct. Complaints, many of which have been brought in the United States District Court for the Southern District of New York, have included allegations that a company’s code of conduct falsely represented company standards or that public comments made by the company about the code misleadingly publicized the quality of ethical controls. In some circumstances, courts found that statements about or within such codes were more than merely aspirational and did not constitute inactionable puffery, including when viewed in context rather than in isolation. In late March 2020, for example, a company settled a securities class action for $240 million alleging that statements in its code of conduct and code of ethics were false or misleading. The facts of this case were unusual, but it is likely that securities plaintiffs will seek to leverage rulings from the court in that class action to pursue other cases involving code of conducts or ethics. It remains to be seen whether any of these code of conduct case holdings may in the future be extended to apply to cases alleging 10b-5 violations for statements made in a company’s ESG reports.
B. State Consumer Protection Laws
Claims under U.S. state consumer protection laws have been of limited success. Nevertheless, many cases have been appealed which has resulted in additional litigation costs in circumstances where these costs were already significant even when not appealed. Recent claims that were appealed, even if ultimately failed, and which survived the motion to dismiss stage, include claims brought under California’s consumer protection laws alleging that human right commitments on a company website imposed on such company a duty to disclose on its labels that it or its supply chain could be employing child and/or forced labor. Cases have also been dismissed for lack of causal connection between alleged violation and economic injury including a claim under California, Florida and Texas consumer protection statutes alleging that the operator of several theme parks failed to disclose material facts about its treatment of orcas. The case was appealed to the U.S. Court of Appeals for the Ninth Circuit, but was dismissed for failure to show a causal connection between the alleged violation and the plaintiffs’ economic injury.
Overall, successful litigation relating to ESG disclosures is still very much a rare occurrence. However, this does not mean that companies are therefore insulated from litigation risk. Although perhaps not ultimately successful, merely having a claim initiated against a company can have serious reputational damage and may cause a company to incur significant litigation and public relations costs. The next section outlines three key takeaways and related best practices aimed to reduce such risks.
C. Practical Recommendations
Although the above makes clear that ESG litigation to date is often unsuccessful, companies should still be wary of the significant impacts of such litigation. The following outlines some key takeaways and best practices for companies seeking to continue ESG disclosure while simultaneously limiting litigation risk.
Key Takeaway 1: Disclaimers are Critical
As more and more companies publish reports on ESG performance, like disclaimers on forward-looking statements in SEC filings, companies are beginning to include disclaimers in their ESG reports, which disclaimers may or may not provide protection against potential litigation risks. In many cases, the language found in ESG reports will mirror language in SEC filings, though some companies have begun to tailor them specifically to the content of their ESG reports.
From our limited survey of companies across four industries that receive significant pressure to publish such reports—Banking, Chemicals, Oil & Gas and Utilities & Power—the following preliminary conclusions were drawn:
All companies surveyed across all sectors have some type of “forward-looking statement” disclaimer in their SEC filings; however, these were generic disclaimers that were not tailored to ESG-specific facts and topics or relating to items discussed in their ESG reports.
Most companies had some sort of disclaimer in their Sustainability Report, although some were lacking one altogether. Very few companies had disclaimers that were tailored to the specific facts and topics discussed in their ESG reports:
In the Oil & Gas industry, one company surveyed had a tailored ESG disclaimer in its ESG Report; all others had either the same disclaimer as in SEC filings or a shortened version that was generally very broad.
In the Banking industry, two companies lacked disclaimers altogether, but the rest had either their SEC disclaimer or a shortened version.
In the Utilities & Power industry, one company had no disclaimer, but the rest had general disclaimers.
In the Chemicals industry, three companies had no disclaimer in their reports, but the rest had shortened general disclaimers.
There seems to be a disconnect between the disclaimers being used in SEC filings and those found in ESG In particular, ESG disclaimers are generally shorter and will often reference more detailed disclaimers found in SEC filings.
Best Practices: When drafting ESG disclaimers, companies should:
Draft ESG disclaimers carefully. ESG disclaimers should be drafted in a way that explicitly covers ESG data so as to reduce the risk of litigation.
State that ESG data is non-GAAP. ESG data is usually non-GAAP and non-audited; this should be made clear in any ESG Disclaimer.
Have consistent disclaimers. Although disclaimers in SEC filings appear to be more detailed, disclaimers across all company documents that reference ESG data should specifically address these issues. As more companies start incorporating ESG into their proxies and other SEC filings, it is important that all language follows through.
Key Takeaway 2: ESG Reporting Can Pose Risks to a Company
This article highlighted the clear risks associated with inattentive ESG disclosure: potential litigation; bad publicity; and significant costs, among other things.
Best Practices: Companies should ensure statements in ESG reports are supported by fact or data and should limit overly aspirational statements. Representations made in ESG Reports may become actionable, so companies should disclose only what is accurate and relevant to the company.
Striking the right balance may be difficult; many companies will under-disclose, while others may over-disclose. Companies should therefore only disclose what is accurate and relevant to the company. The US Chamber of Commerce, in their ESG Reporting Best Practices, suggests things in a similar vein: do not include ESG metrics into SEC filings; only disclose what is useful to the intended audience and ensure that ESG reports are subject to a “rigorous internal review process to ensure accuracy and completeness.”
Key Takeaway 3: ESG Reporting Can Also be Beneficial for Companies
The threat of potential litigation should not dissuade companies from disclosing sustainability frameworks and metrics. Not only are companies facing investor pressure to disclose ESG metrics, but such disclosure may also incentivize companies to improve internal risk management policies, internal and external decisional-making capabilities and may increase legal and protection when there is a duty to disclose. Moreover, as ESG investing becomes increasingly popular, it is important for companies to be aware that robust ESG reporting, which in turn may lead to stronger ESG ratings, can be useful in attracting potential investors.
Best Practices: Companies should try to understand key ESG rating and reporting methodologies and how they match their company profile.
The growing interest in ESG metrics has meant that the number of ESG raters has grown exponentially, making it difficult for many companies to understand how each “rater” calculates a company’s ESG score. Resources such as the Better Alignment Project run by the Corporate Reporting Dialogue, strive to better align corporate reporting requirements and can give companies an idea of how frameworks such as CDP, CDSB, GRI and SASB overlap. By understanding the current ESG market raters and methodologies, companies will be able to better align their ESG disclosures with them. The U.S. Chamber of Commerce report noted above also suggests that companies should “engage with their peers and investors to shape ESG disclosure frameworks and standards that are fit for their purpose.”
Le 2 août 2020, Christiaan de Brauw a publié un intéressant billet sur l’Harvard Law School Forum on Corporate Governance sous le titre « The Dutch Stakeholder Experience ».
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Lessons learned
The Dutch experience shows that the following lessons are key to make the stakeholder-oriented governance model work in practice.
Embed a clear stakeholder mission in the fiduciary duties of the board
To have a real stakeholder model, the board must have a duty to act in the interests of the business and all the stakeholders, not only the shareholders. In shareholder models there may be some room to consider stakeholder interests. For example, in Delaware and various other US states, the interests of stakeholders other than shareholders may be considered in the context of achieving overall long-term shareholder value creation. In US states with constituency statutes, the board’s discretion is preserved: the interests of stakeholders other than shareholders can be, but do not have to be, taken into account. A meaningful stakeholder model requires the board to act in the interests of the business and all stakeholders. This is a “shall” duty, in the words of Leo Strine and Robert Eccles (see Purpose With Meaning: A Practical Way Forward, Robert G. Eccles, Leo E. Strine and Timothy Youmans, May 16, 2020). Rather than allowing for the possibility that all stakeholders’ interests will be taken into account; it should create a real duty to do so. Since 1971, boards of Dutch companies have had such a “shall” duty to follow a stakeholder mission, similar to that of a benefit corporation in, for example, Delaware.
The stakeholder duty must be clear and realistic for boards in the economic environment in which they operate. To define the contours of such a mission in a clear and practical way is not easy, as the journey of the Dutch stakeholder model shows. Today, the Netherlands has a meaningful and realistically defined fiduciary duty for boards. The primary duty is to promote the sustainable success of the business, focused on long-term value creation, while taking into account the interests of all stakeholders and ESG and similar sustainability perspectives. These principles are broadly similar to the corporate purpose and mission proposed by Martin Lipton and others (see On the Purpose of the Corporation, Martin Lipton, William Savitt and Karessa L. Cain, posted May 27, 2020).
Critics of the stakeholder model sometimes point to the ambiguity and lack of clarity of such a pluralistic model. The developments of the Dutch stakeholder model since its inception show that a pluralistic model can work in practice. By now, Dutch boards’ overriding task is adequately clear and aligned with what is typically expected of a company’s executives: pursuing the strategic direction that will most likely result in long-term and sustainable business success. The Dutch stakeholder model also has a workable roadmap to deal with stakeholders’ interests, particularly if they diverge or cannot all be protected fully at the same time, which necessarily results in trade-offs between stakeholders. A realistic approach to governance acknowledges that a stakeholder model does not mean that boards can or should seek to maximize value for all the stakeholders equally and at the same time. It is simply unrealistic to simultaneously pay (and progressively increase) dividends, increase wages and improve contract terms, while also promoting the success of the business. The Dutch interpretation of the stakeholder model, as developed through practice over decades, boils down to the focus on the sustainable success of the business and long-term value creation. As said above, stakeholders are protected by the board’s duty to prevent disproportionate or unnecessary harm to any class of stakeholders. Boards should avoid or mitigate such harm, for example, by agreeing “non-financial covenants” in a takeover. This makes sense as a way to protect stakeholder interests in a realistic manner, much more so than merely requiring boards—without any further guidance—to create value for all the stakeholders.
A stakeholder-oriented model should also be modern and flexible enough to address and incorporate important developments. The Dutch model is especially well positioned to embrace ESG and similar sustainability perspectives. For example, the Dutch company DSM has successfully illustrated this, while being profitable and attractive for investors. There is growing appreciation that being a frontrunner in ESG is required for sustainable business success. In addition to the fact that ESG is required for continuity of the business model and can often give a company a competitive edge, stakeholders increasingly require it. Simply “doing the right thing”, as an independent corporate goal, is more and more seen as important by (new millennial) employees, customers, institutional investors and other stakeholders.
There is no standard test to determine whether a business has achieved sustainable success. There will be different ways to achieve and measure success for different companies, depending on the respective circumstances. Therefore, the test will always have to be bespoke, implemented by the board and explained to stakeholders.
The Dutch stakeholder model has proven to work quite well in times of crisis, such as today’s Covid-19 crisis, as it bolsters the board’s focus on the survival and continuity of the business. The board must first assess whether there is a realistic chance of survival and continuity of the business. If not, and if insolvency becomes imminent, the board’s duties transform to focus on creditors’ interests, such as preventing wrongful trading and the winding down or restarting of the business in line with applicable insolvency/restructuring proceedings. Driven by the economic reality and the need to survive, in times of crisis, boards typically have more freedom to do what it takes to survive: from pursuing liquidity enhancing measures, implementing reorganizations, suspending dividends to shareholders and payments to creditors and so on. The success of the business remains the overriding aim, and in some cases harm to one or more classes of stakeholders may need to be accepted. In addition, in a true stakeholder model, in times of crisis there may not be sympathy for corporate raiders or activists (so-called “corona profiteers” in the current case) who want to buy listed companies on the cheap. A just say not now defense in addition to the just say no defense will readily be available for boards who are occupied with dealing with the crisis and revaluating the best strategic direction. This idea that during the Covid-crisis protection against activists and hostile bidders may be needed seems to be understood as well by, for example, ISS and Glass Lewis, evidenced by their willingness to accept new poison pills for a one year duration (see, for example, ISS and Glass Lewis Guidances on Poison Pills during COVID-19 Pandemic, Paul J. Shim, James E. Langston, and Charles W. Allen, posted on April 26, 2020).
Teeth to protect the stakeholder mission and appropriate checks and balances
The Netherlands has adopted a model in which matters of strategy are the prerogative of the executive directors under supervision of the non-executive directors or, in the still widely used two-tier system, of the management board under supervision of the supervisory board. Similar to the discretion afforded to directors under Delaware’s business judgment rule, a Dutch board has a lot of freedom to choose the strategic direction of the company. In a dispute, the amount of care taken by the board in the decision-making process will be scrutinized by courts, but normally objectively reasonable decisions will be respected. In the Dutch model the board is the captain of the ship; it is best equipped to determine the course for the business and take difficult decisions on how to serve the interests of stakeholders. Generally, the board has no obligation to consult with, or get the approval of, the shareholders in advance of a decision.
At the same time, in recognition of the significant power that boards have in the Dutch stakeholder model, there should be checks and balances to ensure the board’s powers are exercised in a careful manner, without conflicts of interest and without entrenchment. Non-executive/supervisory directors will need to exercise critical and hands-on oversight, particularly when there are potential conflicts of interest. Further, shareholders and other stakeholders are entitled to hold boards to account: boards need to be able to explain their strategic decisions. Shareholders can use their shareholder rights to express their opinions and preferences. Shareholders can also pursue the dismissal of failing and entrenched boards. Boards need regular renewed shareholder mandates through reappointments. The courts are the ultimate guardian of the stakeholder model. The Dutch Enterprise Chamber at the Amsterdam Court of Appeals, which operates in a comparable manner to the Delaware Chancery Court, is an efficient and expert referee of last resort.
The stakeholder model should not convert to a shareholder model in takeover scenarios. The board should focus on whether a takeover is the best strategic option and take into account the consequences for all the stakeholders. In most cases, the best strategic direction for the business will create the highest valuation of the business. But, and this is a real difference with shareholder models, it should be acknowledged that the stand-alone (or other best strategic) option can be different from the strategic option favored by a majority of the shareholders and the option that creates the most shareholder value. This principle was confirmed by the Dutch Enterprise Chamber in 2017 in the AkzoNobel case.
A meaningful stakeholder model requires teeth. The right governance structures need to be put in place to create and protect the long-term stakeholder mission in the face of short-term market pressure. The reality—in the Netherlands as well as in the US—is that shareholders are the most powerful constituency in the stakeholder universe, with the authority to replace the board. In Dutch practice, various countervailing measures can be used to protect the stakeholder mission. A commonly used instrument is the independent protection foundation, the Dutch poison pill. The independent foundation can exercise a call option and acquire and vote on preference shares. It can neutralize the newly acquired voting power of hostile bidders or activists and is effective against actions geared at replacing the board, including a proxy fight. Once the threat no longer exists, the preference shares are cancelled. These measures have been effective, for example, against hostile approaches of America Movil for KPN (2013) and Teva for Mylan (2015).
Foster a stakeholder mindset, governance and environment
Perhaps the most important prerequisite for a well-functioning stakeholder model is the actual mindset of executives and directors. This mindset drives how they will use their stakeholder powers. Fiduciary duties—also in a stakeholder model—are “open norms” and leave a lot of freedom to boards to pursue the strategic direction and to use their authority as they deem fit. The prevailing spirit and opinions about governance are important, as they influence how powers are interpreted and exercised. As an example, the Dutch requirement that boards need to act in the interest of the company and its business dates from 1971, but that did not prevent boards in the 2000s from seeing shareholders as the first among equals. Today, the body of ideas about governance in the developed world is tending to converge towards stakeholder-oriented governance. This seems to indicate a fundamental change in mindset, not merely a fashionable trend or lip service. Board members with a stakeholder conviction should not be afraid to follow their mission, even if it runs counter to past experience or faces shareholder opposition. Of course, the future will hold the ultimate test for the stakeholder model. Can it, in practice, deliver on its promise to create sustainable success and long-term value and provide better protection for stakeholders? If so, this will create a positive feedback loop in which more boards embrace it.
Stakeholder-based governance models remain works in progress. In order to succeed in the long term, models that grant boards the authority to determine the strategy need to stay viable and attractive for shareholders. Going forward, boards following a stakeholder-based model will likely need to focus more on accountability, for example by concretely substantiating their strategic plans and goals and, where possible, providing the relevant metrics to measure their achievements. In reality, stakeholder models are already attractive for foreign investors: about 90% of investors in Dutch listed companies are US or UK investors. In addition, developments in the definition of the corporate purpose will further refine the stakeholder model. In the Netherlands, there has been a call to action by 25 corporate law professors who argue that companies should act as responsible corporate citizens and should articulate a clear corporate purpose.
To make stakeholder governance work, ideally, all stakeholders are committed to the same mission. It is encouraging that key institutional investors are embracing long-term value creation and the consideration of other stakeholders’ interests, for instance by supporting the New Paradigm model of corporate governance and stewardship codes to that effect. However, the “proof of the pudding” is whether boards can continue to walk the stakeholder talk and pursue the long-term view in the face of short-term pressure, either through generally accepted goals and behavior or, if necessary, countervailing governance arrangements. Today, it is still far from certain whether institutional investors will reject pursuing a short-term takeover premium, even where they consider the offer to be undervalued or not supportive of long-term value creation. Annual bonuses of the deciding fund manager may depend on accepting that offer. Until the behavior of investors in such scenarios respects the principle of long-term value creation, appropriate governance protection is important to prevent a legal pathway for shareholders to impose their short-term goals. Therefore, even in jurisdictions where stakeholder-based approaches have been embraced, and are actually pursued by boards, governance arrangements might need to be changed to make the stakeholder mission work in practice. Clear guidance for boards is needed on what the stakeholder mission is and how to deal with stakeholders’ interests, as well as catering for adequate powers and protection for boards.
The Dutch model, which requires a company to be business success-driven, have a “shall duty” to stakeholders that applies even in a sale of the company, and that recognizes that corporations are dependent on stakeholders for success and have a corresponding responsibility to stakeholders, has been demonstrated to be consistent with a high-functioning economy. By highlighting the Dutch system, however, I do not mean to claim that it is unique. For policymakers who are considering the merits of a stakeholder-based governance model, the Dutch system should be seen as one example among many corporate governance systems in successful market economies (such as Germany) that embrace this form of stakeholder-based governance. There is likely no one-size-fits-all approach; each jurisdiction should find the tailor-made model that works best for it, like perhaps the introduction of the corporate purpose in the UK and France. In any event, there is a great benefit in exchanging ideas and learning from experiences in different jurisdictions to find common ground and best practices in order to increase the acceptance and appreciation of stakeholder-oriented governance models.
US governance practices have been, and are, influential around the world. In the 2000s the pendulum in developed countries, including to some extent in the Netherlands, clearly swung in the direction of shareholder-centric governance as championed in the US. In the current environment, if the US system’s focus on shareholders is not adjusted to protect stakeholder interests, it may over time perhaps become an outlier among many of the world’s leading market economies that in one way or the other have adopted a stakeholder approach. Adjustment towards stakeholder governance seems certainly possible in the US, for example through the emerging model of corporate governance, the Delaware Public Benefit Corporation. The benefit corporation seems to have many if not all of the key attributes of the Dutch system and could provide a promising path forward if American corporate governance is to change in a way that makes the US model truly focused on the long-term value for all stakeholders. The question for US advocates of stakeholder governance is whether they will embrace it, or adopt another effective governance change, and make their commitment to respect stakeholders rea
En cette période estivale, suivre l’actualité est toujours intéressant. Ma lecture d’un article ce matin « Renewed Interest in IPOs of Public Benefit Corporations » (de Cydney Posner) m’apprenait que l’État américain du Delaware est en train de débattre d’une réforme législative en matière d’entreprise à mission !
These and other similar risks are some of the reasons that, in adopting laws authorizing PBCs, the Delaware legislature made it particularly difficult to convert a traditional corporation to a PBC. For example, currently, the approval of 2/3 of the outstanding stock is required for a traditional corporation to amend its certificate of incorporation to become a PBC or to merge with another entity if the effect of the merger is to convert the shares into shares of a PBC. (Note that, originally, the vote required for conversion was 90%, which made it well nigh impossible for a traditional public company to convert to a PBC.) Appraisal rights are available to stockholders that did not vote in favor of the conversion or merger. And the same vote is required for conversion from a PBC form of entity into a traditional corporation.
The legislation that was just passed by the House in Delaware would, if ultimately signed into law, eliminate the 2/3 voting requirements, making it easier to convert a traditional corporation to a PBC or a PBC to a traditional corporation. Only the standard stockholder vote provisions would be applicable—generally a vote of a majority of the outstanding shares (or any greater or other vote required under the company’s certificate of incorporation) would be required. The amendments would also eliminate the special appraisal rights provisions, with the result that appraisal rights would not be available for conversions resulting from amendments to the certificate, but standard appraisal rights (§262) would be available in the context of mergers.
In addition, as noted above, the current PBC statute mandates that the board of directors manage the business and affairs of the PBC by balancing “the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.” The statute provides that, with respect to a decision implicating the “balance requirement,” directors of PBCs will be deemed to satisfy their fiduciary duties to stockholders and the corporation if their decision “is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.” A PBC is also permitted to include in its certificate, for purposes of its director exculpatory provisions under §102(b)(7) and its indemnification provisions under §145, that any disinterested failure to satisfy the mandate will not be considered to “constitute an act or omission not in good faith, or a breach of the duty of loyalty.”
The new legislation would also amp up the protections for directors of a PBC. The amendments would clarify that a director would not be considered “interested” in connection with a balancing decision solely because of the director’s interest in stock of the corporation, except to the extent that the same ownership would create a conflict of interest if the corporation were not a PBC. The amendments would also provide that, in the absence of a conflict, no failure to satisfy the balancing requirement would, for purposes of §102(b)(7) or §145, be considered “an act or omission not in good faith, or a breach of the duty of loyalty, unless the certificate of incorporation so provides.” That is, the certificate would no longer need to expressly provide for the protection for it to apply. In addition, the amendments would provide that, to bring any lawsuit to enforce the PBC balancing requirement, the plaintiffs must own at least 2% of the corporation’s outstanding shares or, for PBCs listed on a national securities exchange, shares with a market value of at least $2 million, if lower.
