Will Corporations Be Required To Become Social Activists?
The corporate world may be anticipating its biggest change since the SEC Act of 1934. As enormous companies stretch across nations, they are expected to become progressive citizens of the world, not simply money generating enterprises.
Directors of corporations, in addition to their more traditional duties, now increasingly have to consider issues of corporate social responsibility, defined by the American Bar Association as “voluntary corporate programs and practices that promote fairness, transparency, accountability and ethical behavior across global business, legal and social institutions.” Under these principles, directors not only owe duties to the shareholders who elected them, but they may also owe duties to company employees, other affected entities, the legal system at large and to “the public good.” All while maintaining the strong economic performance of the company in service of the shareholders.
Corporate governance is changing in surprising ways in an era that features both the #metoo movement and the rollback of Great Recession-era financial and environmental regulation. Consider these few developments:
California recently enacted legislation that requires all publicly-held corporations with their principal executive offices in the state to have at least one female director on their boards by the end of 2019 and, for such corporations with at least six directors, to have at least three female directors by the end of 2021.
In August, Senator Elizabeth Warren introduced “The Accountable Capitalism Act” and opined in connection with its introduction that companies should not be accountable only to their shareholders. Among other things, the Act would create a mandatory federal charter issued and overseen by a “super secretary of state’ for companies with $1 B or more in annual revenue, empower workers to elect at least 40% of the directors, and subject political spending to a supermajority vote of the shareholders.
No fewer than 43 states have statutory provisions for so-called “benefit corporations”. Benefit corporations are distinct from other types of corporations in that the directors of such companies are required to consider the public benefits specified in the benefit corporation's articles of incorporation when managing or directing the business and affairs of the benefit corporation; and to adopt standards by which to measure the benefit corporation’s performance in pursuing such benefits. (Georgia is not yet among these states, but a benefits corporation bill was introduced and withdrawn in the 2017 session (HB 278)).
Larry Fink, the CEO of Black Rock, the world’s largest asset manager, in a public letter this past April, admonished the leaders of public companies that he planned to ask “hard questions” on their plans to integrate ESG (environmental, social and governance) factors into long-terms strategy and management. Fink’s letter seems to presage a major shift in the way we evaluate the creditworthiness of large corporations.
As this trend towards corporate social responsibility continues to develop, directors may find themselves increasingly torn between executing their traditional duties to their shareholders and acting in the interest of a much broader constituency.