41. How companies are responding as the Pendulum Swings: ESG risk management, Board Diversity and Stakeholder Capitalism

In this episode, Terry Johnson, an attorney who advises management and board members of both private and public companies, talks about what clients are facing regarding ESG risk identification and management, and how boards are responding to the growing push back against mandated board diversity and stakeholder capitalism.

 

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Bio

Terry is a corporate and securities partner at the law firm of Arnold & Porter.  She acts as a trusted advisor to the C suite, boards of directors and board members. In her corporate governance work, she advises both public and private company boards and management on board diversity and stakeholder capitalism. Among other areas, her practice often involves counseling management and boards about ESG risk management, including disclosure and liability issues.  She often speaks and writes about corporate governance and in particular, board diversity, including the California board diversity legislation and NASDAQ’s listing rules, and she has authored articles in the Financial Times regarding the effectiveness of quotas in achieving board diversity and the treatment of climate change as a systematic risk to global finance. Terry’s experience also includes representing wineries and winery owners, and family-owned companies in a variety of industries.

She has been recognized by the Daily Journal as one of the Top 100 Women Lawyers in California and has been included in Best Lawyers in America since 2014.  In 2022 Terry was selected by the San Francisco Business Times as one of the 13 OUTstanding Voices paving the way for LGBTQ equality in the workplace in its annual Business of Pride awards.  Terry is currently the Treasurer of the Bar Association of San Francisco, in line to assume the presidency in 2024.

 

Links

 

Caught in the Culture Wars Crossfire: Board Diversity Initiatives Under Attack

 

SEC Approves Nasdaq Diversity Proposal

 

Public shaming will not solve the lack of diversity on corporate boards

 

Treat Climate Change as a Systemic Risk to Global Finance

 

Quotes

 

Board Diversity

We are now starting to see a pushback on ESG generally and board diversity in particular as witnessed by the challenges to the California legislation regarding board diversity.  Conservative groups are also bringing claims in the Fifth Circuit in Texas against NASDAQ's board diversity listing rule.

 

The NASDAQ rule is not mandatory, it's not a quota, it's a comply or disclose and explain why. Essentially, you're not required to put more diverse directors on the board, you just have to tell people why you haven’t, but in today's world, knowing that there would be a strong disincentive to having to explain why you couldn't find a qualified woman for your board or you couldn't find a qualified member of an underrepresented group.

 

The investment community has been the loudest voice in support of board diversity, but we're certainly starting to hear other voices that are pushing back and saying, "No, we think you ought to be simply deciding board members based on the way we've always done it."

Diversity quotas are a “rough justice” approach in that it requires you to put different people on boards - but it does work.

The argument against mandated board diversity is that that instead of making a decision about a board member based on pure merit, it’s made on another basis: "We don't want to be required to pick a director who happens to be a woman or director who happens to be part of a member of an underrepresented community, we want to pick the best director whoever that is."

 

Big Ideas/Thoughts

ESG risk management

The ESG realm is huge, I mean, just climate change alone under the E part of it, is an enormous topic in itself, and then S and G, the social and governance aspects of it are related, but completely separate sets of issues and concerns to think through.

 

Wildfires are a huge concern here in California, which is where I'm based, and a good example of ESG risk management.  I'm talking to clients about in various respects about how to think about potential liability, how they could be affected by wildfires. If they are involved in a business that puts them at risk for liability related to wildfires, how to consider that - that's just one example of things that I'm starting to see come across my desk.

 

One of the things that is challenging to navigate the ESG waters, especially for public companies, is that you have to figure out how to say things because you want to let the market know about your commitment, but at the same time, not set yourself up for liability, and that's a huge challenge.  For example, what it means is reading your ESG report side by side with the 10-Ks and 10-Qs and other periodic reports you've put out under your 34 Act reporting and making sure that at the bottom line, you don't have inconsistencies.

 

You have to be clear with the market and with all of your stakeholders, which would include not only your shareholders, but your employees and your suppliers and the communities in which you do business and so forth about exactly what you're going to do and to be careful about not making statements that could be called greenwashing, not overstating what you're going to do.

 

Stakeholder Capitalism

 I think that the Business Roundtable's statement in August of 2019 really had an enormous impact on changing the conversation about stakeholder capitalism. It put that on the front page of every business newspaper, and it brought it to the forefront in a way that I don't know that any other kind of initiative could have done. 

 

You have buy-in from companies that are the leading corporate lights, companies that are solidly in the mainstream, the biggest financial institutions, for example. I think that's really a good thing.

 

Q: When you advise your clients about stakeholder capitalism, what do you advise them to do in order to be able to manage this issue?

 

I draw their attention back to their fiduciary duties because the bottom line is, as a director, you have fiduciary duties, and that's what governs your job, that's your north star in fulfilling your duties as a member of the board…you have a fiduciary duty to your stockholders.

 

Regarding short-term and long-term goals and how you look at it in advising directors, I would say, "Well, your fiduciary duty is to your shareholders. You don't have a technical fiduciary duty to your stakeholders, but it's a question of looking at the long term and looking down the road.

Do you see that in order to operate your business in the longer term, you're going to need to start planning for the effects of climate change? You're going to need to start pivoting away from a particular business because it has such a high carbon impact, or maybe you want to invest in something that is a carbon capture technology?”

 

 It all comes back to your shareholders - from a legal standpoint, that's still the guiding light.