Monday, April 5, 2010

Do Directors have a fiduciary duty on sustainability?

I'm a guest blogger today on CSRwire Talkback on "Legal frontiers of Sustainability." As investor's counsel, I explain why/how we asked Intel's Board to address CSR/Sustainability as fiduciaries.

According to a recent CERES report, aligning economic prosperity and environmental sustainability will demand new strategies in the board room and executive suite. First among the strategies identified by CERES is a need for every corporate board of directors to assign a board committee to oversee sustainability. A number of US companies have already taken this step. There is a sound business case for doing so. Companies that are attentive to sustainability in many sectors have done better than average financially during the financial slowdown. Also, many companies are finding that they can use a sustainability focus to drive their leadership as innovators.

Notably, just a week after CERES issued its report, Intel’s Board of Directors decided to modify a committee charter to better integrate sustainability and corporate social responsibility. Moreover, the company acknowledged that the change makes these issues part of committee members’ fiduciary duties.

These changes to the committee charter happened after my legal client, Harrington Investments, Inc. (HII) had filed a shareholder resolution, for the second year in a row, to amend Intel’s bylaws to create a Board Committee on Sustainability.  Intel initially opposed the resolution at the Securities and Exchange Commission.  But a subsequent dialogue with HII yielded an agreement  (in exchange for withdrawal of the resolution) to propose changing the governance and nominating committee charter to require the committee to:

“review(s) and report(s) to the Board on a periodic basis with regards to matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics.”

As part of the dialogue, Intel also had its outside legal counsel Gibson, Dunn & Crutcher LLP ink an opinion clarifying that pursuant to Delaware law, the committee’s charter generates a fiduciary obligation. The legal memo cites the notion of a “charter imposed duty” as clarified by In re Walt Disney Co. Derivative Litigation, 906 A.2d 27, 53-54 (Del. 2006).

Although the case cited, Walt Disney involved a finding by the  Delaware Supreme Court that a $130 million severance payment  to Michael Ovitz did not entail a breach of the directors’ duties,  the case is widely cited for  the notion that directors have a fiduciary duty to “act in the face of a known duty to act.”  Thus by integrating sustainability and corporate social responsibility into a committee charter, committee members gain a fiduciary duty to attend to those issues.

As HII’s lawyer in this process, I find the inevitable legal questions flowing out of this analysis particularly interesting.  First of all, do all directors already have a fiduciary obligation regarding sustainability and corporate social responsibility? The answer is that within certain relatively uncharted boundaries they do. For instance, when it comes to oversight of environmental compliance, or social issues that may affect a company’s reputation, the duty of care attendant to directorship clearly extends such issues interwoven with the company’s prospects. An excellent aw review article,  “Is There An Emerging Fiduciary Duty To Consider Human Rights?” by law professor Cynthia Williams details this obligation, for instance, in the arena of human rights.  

How then does the insertion of specific language into a committee charter alter the scope of directors’ fiduciary duty on these issues? Contrary to the vagaries of evolving fiduciary obligations, with little delineation of the scope of a director’s obligation, the committee charter is very specific. It asks for the members to examine, for instance, “potential long and short-term trends and impacts to our business of environmental, social and governance issues.”  It gives much clearer guidance as to the range of issues under committee scrutiny, including  “long term” trends, and “potential” issues.
Finally, under what circumstances might the resulting fiduciary duty be deemed enforceable by the courts?

In general, the deliberations of directors are shielded by the “business judgment rule” which“ presumes that ‘in making a business decision the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company.’ ” Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984).  So, it takes more than just a mistake by board members to face any liability exposure.  In general, the kinds of failures in their duties of care and good faith that would trigger liability would involve intentional dereliction, a conscious disregard for one’s responsibilities, an actual intent to do harm, or gross negligence.  

I believe the most immediate legal implication may be the enhanced duty of the directors to inquire and to oversee.  Specifically, when potential sustainability or corporate social responsibility issue present significant risks or opportunities to the company, the committee members have a duty to ensure that they are reasonably well informed. Secondly, they must ensure that the management is on top of the details, with sufficient internal controls in place, such as enterprise risk management systems.

Given the fiduciary duties that accompany this expanded committee role, it seems well worthwhile to encourage more boards of directors to ensure that sustainability and corporate social responsibility are well- delineated in committee charters.

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