Reconciling Shareholder Primacy and the Interests of People and Planet

Reconciling Shareholder Primacy and the Interests of People and Planet Speakers: Prof. Ferran (University of Cambridge), Dr Pedro Schilling de Carvalho (UCL Laws) Discussant: Prof. Micheler (LSE) Chair: Dr. Donovan (UCL Laws) Date: 28 February 2025, 1:00 pm–2:00 pm Shareholder Primacy As A Threat To People And Planet - Shareholder primacy implies freedom for companies that are controlled by climatesceptic profit maximisers to pursue business strategies that may be damaging to people and planet - Conventional view is that core company law (directors' duties) do not meaningfully constrain this type of behavior - Failure of the UK ClientEarth litigation supports this view - As does the decision of the UK Supreme Court in Sequana • duty of proper regard for creditor interests implications for governance rights such as ratification; enforceable by a creditor via a misfeasance claim under Insolvency Act 1986 • s 172(1) duty of mere regard for stakeholder interests → no implications for governance rights; significant barriers to minority shareholder enforcement in terms of (i) standing to bring derivative claim, and (ii) establishing proof of substantive breach • Enlightened shareholder value largely disregarded by Supreme Court (apart from Lady Arden Why Displacing Shareholder Primacy Is Not The Answer (For Now) - Shareholders v stakeholders: decades old debate - Stakeholder shift would require deep structural change to company law - Extensive discussion pre CA2006→s 172(1) ESV • Flawed political compromise - Radical change does not fit with the prevailing growth/competitiveness political agenda - Lacks sector-specific granularity in the short-term - Companies can opt into pro-sustainability structures (constitutional provisions, dual class share structures, restrictions of share transfers, PBCs and alternative corporate forms) but the choice lies ultimately with shareholders, not directors - Need to look elsewhere for effective ways to strengthen corporate accountability for negative externalities - But not leaving company law behind completely... emphasis on complementarities The Regulatory Option - Company law and corporate governance: enabling and facilitative - Regulation: forcing internalization of externalities or (at least) transparency about responsibility for externalities → • Public mechanisms of enforcement  Public sanctions... The price of doing business... Market penalties (cost of capital, high insurance premiums) loss of regulatory license/consent  Public scrutiny (social license) of companies and their controllers  Investment in corporate compliance  Learning and behavioral change • Standard raising → implications for what directors need to do to discharge their core company law duties private enforcement Limitations of regulation - In some areas, neither regulation nor fundamental change may be the right option. - We acknowledge that a regulatory approach is not a panacea and has its own limitations. • Lipton: we cannot rely solely on legal prohibitions to curb all antisocial corporate activity, because it is impossible to specify in advance - let alone enforce laws against - every potential form of corporate misbehaviour. • The adoption of regulatory requirements is not a simple task e.g., EU omnibus law and the watering down of the EU Taxonomy Regulation; reduction of scope of the CSDDD; removal of Scope 3 emissions from disclosure regimes. • Public enforcement has its own weaknesses and challenges. • A slowing regulatory agenda does not undermine our thesis, which is rooted in policy pragmatism, not regulatory zealotry. Factors Affecting Where Directors Sits On Spectrum - Shareholder expectations and metrics (TSR, EPS, EBITDA, ROE, Rol, credit rating ...) - Business sector and nature of operations - War for talent pressure - Remuneration performance metrics - Corporate compliance culture - Knowledge, skill and experience - Reputation and career aspirations - Openness to learning Beyond The Compliance And Enforcement Focus: Leaning In - - Growing demand for board level competence in new areas • Designated independent non-executive director for ESG • Sustainability board committee Regulation as standard raiser • 'promoting education [...] in environmental matters does not guarantee that greater priority will be given to protecting the environment. But the assumption is that it is likely to have that result, or at least that it is a prerequisite' (Finch v Surrey CC Lord Leggatt) - • can enable broader corporate cultural change • new sources of business advantage CA2006, s 172(1) ESV & associated disclosure requirements → • 'A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society (UKCGC 2024) Sustainability Regulation Examples - - - Disclosures • From voluntary to mandatory, with sharpening of the scope. • Data on blind spots is relevant for SHs and systemic risks. • Adopted by over 130 countries and 80 int/reg. organizations. Transition Plans • TPT Frameworks. • Sector Summary and Sector Deep Dives. • Affects planning and decision-making at the board level and below. Taxonomies • Frameworks complemented by technical screening criteria that can evolve as science progresses. • Simpler versions adopted in Asia and Latin America. The Evolution Of Sustainability Regulation - On the speed of recent developments: TCFD → ISSB, with many examples of domestic implementation and supported by other frameworks (e.g., labels). • - Mandatory and voluntary policies adopted in 130+ countries. A more proactive process when compared to the often reactive nature of crisis-driven regulation. - On the iterative nature of recent developments: more regulation that only applies to a sub-set of the corporate population that is critical to societal goals (plcs; companies of sufficient size and scale; operating in critical market segments). - Such speed and iterative nature allow for granularity to be gained in key sectors, which is key given the complexity of science. - Potential for knock-on effects in areas such as prudential regulation. Regulation As A Driver For Board Level Standards Of Sustainability Literacy And Accountability - Reduces blind spots - Uncovers problems earlier - Creates expertise - Provides robust frameworks for risk-based decision-making - Establishes guardrails that enhance credibility... - and curb greenwashing - across multiple levels of firms - Lessens gap between science and legal consequences - Lessens gap between science and legal consequences - Enables public enforcement - Informs market and social accountability - Influences what 'good' governance looks like - Shapes expectations of what directors need to do to discharge duties; even disclosure duties can have behavioral consequences - Makes private enforcement easier? Increased Regulatory Emphasis On Sustainability Greater Risk Of Oversight Failure Liability - Resurgence of interest in liability arising from board/officer oversight failure (Caremark) in US litigation and scholarship. Bad faith liability standard. Focus on 'central compliance risks' - UK law also recognizes possibility of liability for board oversight failure. Negligence liability standard • Beatson LJ Brumder v Motornet Service and Repairs [2013] EWCA Civ 195 [47]  Where, as is the position of the appellant, a director/claimant has paid no attention whatsoever to health and safety issues, and has abrogated his responsibilities as owner and director of the company for them, he will be in breach of his duty qua director under section 174(2) (a) of the 2006 Act • Jonathan Parker J Re Barings plc [1999] 1 BCLC 433, 489  sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors  Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their Competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions  No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company - Board oversight of risk management and internal controls: UKCGC 2024 Enforcement Mechanisms - Public mechanisms of enforcement in specific regulatory domains (environmental law, health and safety law, employment law, prudential regulation ...) • Thames Water (2024): In 2023 Ofwat imposed license condition relating to dividend policy (take account of service delivery, environment, performance levels); in 2024 Ofwat determined TW had not complied with license condition financial penalty - Public mechanisms of enforcement regarding company disclosures, including future strengthened enforcement against directors of PIEs in respect of corporate reporting and audit obligations via the new Audit, Reporting and Governance Authority (ARGA) - 'Stepping stone' or 'dog leg' claims: holding directors accountable for compliance failures by companies • Not intended that ARGA will have enforcement powers with respect to general directors' duties (compare ASIC pursuit of directors for breach of their company law duties where director has authorized or permitted a company's contravention of statutes (civil penalty regime)) • Autonomy v Lynch - company pursuit of former directors responsible for company liability under FSMA s 90A (issuing inaccurate financial reports) • Thames Water - company chairman facing accusations of conflict of interest arising from being chair of both TW and its parent company Retrenchment - World events magnifying short-term profitability of traditional energy over decarbonization - Traditional energy underpinning energy security in time of geopolitical fragility - Regulatory overreach holding back country/regional competitiveness - Political pendulum swing away from 'wokeness' - But core thesis remains robust despite deregulatory phase - Regulatory pragmatism and proportionality Comments on Eilis Ferran and Pedro Schilling de Carvalho, 'Reconciling Shareholder Primacy and the Interests of People and the Planet' Thesis of the paper - Company law gives priority to the interests of shareholders - Too much ink has been spilt on discussing a modification of CA 2006, s 172 - We need to widen the scope of analysis. - Company law and regulation work hand-in-hand. - Risk-management plays a pivotal role. Comments - Timely paper - Pro-shareholder orientation ≠ profit maximization - CA 2006, s 172: unproductive debate - subjective - standard - references moral compass - references social norms Comments - combining company law with regulation - internal control systems (CA 2006, s 174) as the anchor - power of complementarity - David Gindis and Eva Micheler, Institutional Theory for Corporate Law and Invitation, (2024) 24 JCLS (online): meta-constitutional level - company law has a role in enhancing compliance - granular disclosure requirements • educational effect • social control • John Parkinson, 'Disclosure and Corporate Social and Environmental Performance: Competitiveness and Enterprise in a Broader Social Frame (2003) 3 JCLS 3 • self-reflection and civic regulation Questions - Disclosure overload - How will the recent US move away from ESG affect the appetite of • litigation funders to use FSMA 2000, s 90a for E and S purposes. • governments to regulate (draft EU Omnibus Directive)