July 2, 2020

Some Thoughts for Boards of Directors in 2020: A Mid-Year Update

Martin Lipton, Steven A. Rosenblum, and William Savitt | Harvard Law School Forum

The past six months have been marked by a profound upheaval that has accelerated the growing focus on both the purpose of the corporation and the role of the board in overseeing and leading the corporation in ways that promote sustainable business success. For a number of years, there has been a growing sense of urgency around issues such as climate change, environmental degradation, globalization, workplace inequality and the need to keep pace with rapidly evolving technologies. Then, in recent months, the COVID-19 pandemic prompted a systemic shock, which has been accompanied by a long overdue awakening regarding endemic racial injustice. The convergence of these events has accelerated the focus on environmental, social and governance (ESG) issues and stakeholder capitalism as operational and strategic imperatives that are core to corporations’ abilities to compete and succeed. The well-being of employees and other stakeholders, and the ability to engage in more sustainable ways of doing business, are not a nice-to-have luxury or a branding exercise, but rather a basic building block of corporate value. There is an essential nexus between “value” and “values.”

Attention is being focused not just on stock price and quarterly financial results, but also on understanding what is needed to manage through challenging business conditions, strengthen the business and ensure it is well-positioned to execute on strategic goals as conditions normalize. It is clear that value is not necessarily equivalent to stock price, particularly as the limitations of the stock market as the “all-things-considered” arbiter of value have been illustrated by seemingly capricious volatility, precipitous plunges and exuberant upward trajectories that, in some respects, have defied reality. A more holistic conception of value that is anchored not only in financial results and stock price, but also in a more nuanced understanding of a corporation’s strengths and weaknesses that takes into account factors that are often difficult to quantify (such as corporate culture and employee well-being), goes hand-in-hand with stakeholder governance and the idea that a myopic focus on stock price and shareholder returns will ultimately limit, rather than enhance, the overall value of the corporation.

As directors work to maintain focus in these uncertain times, it is more important than ever to have a clear understanding of and conviction about the corporation’s purpose. This is the anchor and compass that boards require to chart the path forward towards a new normal and is the bridge that reconciles value with values. As BlackRock CEO Larry Fink recently observed, “Companies and investors with a strong sense of purpose and a long-term approach will be better able to navigate this crisis and its aftermath.”


Stakeholder Governance

A strong and growing consensus of corporations, investors, academics and leading institutions—including the Business Roundtable, the British Academy and the World Economic Forum—have overwhelmingly embraced stakeholder governance. The consensus recognizes that directors should not be required to act as if any one stakeholder trumps all others, with potentially value-destructive consequences. Instead, they have latitude to make decisions that reasonably balance the interests of all constituencies and operate to promote sustainable, long-term business success of the corporation as a whole.

Stakeholder governance is fully consistent with well-established principles of corporate law and the existing fiduciary duty framework for directors. The directors of a corporation have a fiduciary duty to promote the success and value of the corporation, and the means and time horizon for achieving such goals are within the purview of the board’s business judgment. Furthermore, the exercise of balancing competing interests and risks to pursue the best interests of the corporation is the very core of business judgment, and the decisions of unconflicted directors, acting upon careful deliberation, will be fully protected by the business judgment rule. As we have previously discussed, there is no rule of law that mandates the ideology of share-price maximization, or case law requiring directors to manage the ongoing business of a corporation with the paramount goal of maximizing share price.

For an example of how stakeholder governance could influence board decision-making, Yvan Allaire and Stéphane Rousseau have outlined a framework for corporate governance in a multi-stakeholder context that suggests that directors should (i) be explicit about how the decisions they make relate to the objective of maximizing the corporation’s long-term value, (ii) adopt a rigorous and explicit decision-making process that involves identifying stakeholders and their level of relevance for the decision, (iii) consider the reasonable expectations of all stakeholders, including shareholders and (iv) finally, render fact-based business judgment as to the course of action that would best serve the long-term interests of the corporation. This framework recognizes the competing tensions between stakeholders, but also accounts for the differing relevance of stakeholders for certain decisions and focuses on the long-term interests of the corporation as the overarching goal. Boards and board committees that follow a similar framework will be fully protected by the business judgment rule.

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