CLS Blue Sky Blog

Wachtell Lipton Puts a 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 ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors.  The 2016 and 2020 statements of corporate purpose by the World Economic Forum and the 2019 embrace of stakeholder capitalism by the Business Roundtable, together with current statements of policy by most of the leading corporations, institutional investors, asset managers and their organizations, as well as governments and regulators in and outside the United States, lead us to summarize the purpose of the corporation:

The objective and purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to ensure its success and grow its value over the long term.  This requires consideration of, and regular engagement with, all the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, communities and society at large) as determined by the corporation and its board of directors using their business judgment.  Fulfilling this purpose in such a manner is fully consistent with the fiduciary duties of the management and the board of directors and the stewardship duties of shareholders (institutional investors and asset managers), who are essential partners in supporting the corporation’s pursuit of its purpose.

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 commanded the attention of investment banks, public relations firms, investor relations firms, law firms, management consultants and other advisors.  As a 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 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 have 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) responsible investor stewardship to further long-term, sustainable value creation.

Boards should:

Corporations should seek to:

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Spotlight on Boards,” dated September 1, 2021.

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