Wachtell Lipton Memo: Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  The coronavirus pandemic and resulting economic turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, is propelling a decisive inflection point in the responsibilities of boards of directors.  The 2020 statement of corporate purpose by the World Economic Forum is a concise and cogent reflection of the current thinking of most of the leading corporations, institutional investors, asset managers and their organizations, as well as governments and regulators outside the United States:

The purpose of a company is to engage all its stakeholders in shared and sustained value creation.  In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.  The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.

The salient question has shifted from whether a board of directors should take into account the interests of stakeholders other than shareholders, to how a board should do so.  The focus of investors and organizations concerned with corporate social responsibility, ESG and sustainability is pervasive and intense.  It has attracted the attention of investment banks, public relations firms, investor relations firms, law firms and management consulting firms.  As a recently released advisory report from McKinsey notes, “A large spotlight is shining on corporate actions these days, and all stakeholders have growing expectations.  A board’s involvement in defining purpose helps meet those expectations.”

In this environment, directors need to grapple with a host of questions about the practical implications of this new paradigm, such as adjusting existing board functioning to reflect stakeholder governance, defining corporate “purpose” and shaping corporate “culture,” integrating ESG considerations into long-term business strategy and measuring and delivering sustainable value to all stakeholders.  Directors are also facing questions about the contours of the board’s legal obligations, and what, if any, modifications should be made to communications and engagement efforts with shareholders and other stakeholders.  In addition, the current pandemic has heightened the emphasis on effective and adaptive crisis management, and events of the past year  have shone a light on the role of all market participants in combatting social and racial inequality.  The legal rules as to directors’ duties have not changed.  What has changed are the expectations of investors and other stakeholders for (1) greater transparency, (2) deeper board engagement and oversight, (3) greater opportunity to engage with directors and (4) exercise of investor stewardship to further long-term, sustainable value creation.

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