Increasing corporate focus on environmental, sustainability, and governance (“ESG”) has prompted considerable criticism from across the ideological spectrum.  Those who disagree with that focus – viewing it as a breach of fiduciary duty and antithetical to profit maximization – have sparked a so-called “anti-ESG” movement.  But even those who believe that ESG aligns with shareholder value and the best interests of the corporation raise concerns, especially about how best to ensure that corporate ESG commitments are  not merely rhetorical, greenwashing, or a passing fad.  To shed light on these concerns and gain perspective about the potential illusory or short-term nature of ESG, I conducted a survey of the committee charters of the top 50 companies in the Fortune 100.

Based on the survey, my essay makes several contributions to the ESG discourse.  First, the essay highlights the substantial increase in board committee charters incorporating oversight of ESG activities during the same period in which corporations have increased their rhetoric and focus on ESG.  My survey revealed that 43, or 86 percent, of large companies have a board-level committee or committees responsible for oversight over ESG.  My survey also indicates that at least 37, or 83 percent of Fortune 50 corporations altered their committee charters or created stand-alone committee charters to reflect increased board oversight of ESG within the last three years.  These findings reveal that board oversight of ESG within top corporations is strong and has coincided with the rise in ESG rhetoric.

Second, the essay argues that the increase in ESG oversight within committee charters strongly suggest that boards have taken steps towards greater accountability for  ESG.   Board oversight has always been viewed as a critical component of corporate accountability because it increases the likelihood of rigorous corporate attention to the overseen matters.[1]  Shareholders have prioritized board oversight of ESG precisely because of their belief that ESG accountability is contingent upon effective board oversight.[2] Courts also emphasize the importance of the board oversight role to accountability.[3]  Boards operate largely through committees, making them integral to board oversight – they are in fact the genesis of the board’s oversight.[4]  Such committees enable boards to delve more deeply into discrete issues material to the corporation.  If committees are a critical focal point for board oversight, then the charters establishing them and outlining the contours of committee responsibility are also critical.  Hence, the designation of board responsibility for ESG matters within committee charters strongly suggests enhanced board-level attention and oversight related to these matters.  Committees are a relatively permanent feature of a board, with most boards having embedded ESG oversight into committees that are required to exist, such as the nominating or the audit committee.

Importantly, incorporating oversight of ESG into committees increases the likelihood that ESG oversight will be long-term.  When committees have oversight over particular issues, it means that, at a minimum, committees receive annual information and updates about those issues, allowing committee members and the board to weigh-in and make year-to-year comparisons.  Thus, the incorporation of ESG oversight into board committees reflects an increased likelihood that board accountability over ESG will be a long-term feature of the board’s role.

Third, the essay argues that the existence of these revised committee charters repudiates claims that corporate ESG commitments have been solely rhetorical or illusory.  For example, some 80 percent of companies that signed the Business Roundtable Statement expressing a commitment to stakeholders appeared to have altered their board charters to reflect some increase in board oversight of ESG after signing such statement.  Moreover, 91 percent of the Fortune50 companies that signed the statement updated their committee charters after signing it.  Thus, the survey refutes claims that boards failed to take any steps to promote ESG and that corporate commitment to ESG is merely rhetorical.  Given the importance boards, shareholders, and the courts place on board oversight for purposes of corporate accountability, the survey also refutes claims that corporations have not taken any meaningful actions to follow through on their ESG commitments.

To be sure, some may raise questions about the implications of my survey for ESG accountability.  First, the survey only captures board practices of the top 50 companies within the Fortune 100, and thus does not speak directly to board practices generally.  However, shareholders have been pressuring all corporations to embrace board oversight of ESG, and there is growing evidence that corporations have responded.[5]  This evidence suggests that my survey is capturing a corporate governance trend among a larger segment of corporations.  Then too, shareholders deliberately target large companies because of their larger impact on environmental and social issues, suggesting that the findings of my survey are important for ESG accountability even if they remain isolated to the largest companies.  Second, the essay agrees that board oversight is no guarantee of increased ESG accountability.  The essay does not deny that some boards and corporations engage in questionable practices around ESG or that corporate ESG commitments may not be perfectly aligned with corporate behavior.  However, the essay does argue that, in light of the board’s critical role in oversight and accountability, incorporating ESG oversight into committee charters, and thus committee responsibilities, represents an important first step towards enhanced board engagement around these issues.   In this regard, the essay and its survey does call into question the sweeping condemnation of corporate ESG commitments as illusory and thus insignificant.

Fourth, the essay emphasizes the need for shareholders and boards to pay attention to the ESG issues identified in committee charters.  Most committee charters refer to committee responsibility over ESG generally and to specific ESG issues over which boards have oversight.  The survey revealed that the top five issues identified within committee charters were: (1) Environmental (81 percent); (2) Political Spending and Lobbying (60 percent); (3) Charitable Contributions (42 percent); (4) Diversity (39 percent); and (5) Corporate Responsibility (37 percent).  Also mentioned often were Human Rights (23 percent) and Health and Safety (23 percent).  The survey revealed significant variation among the ESG issues specifically identified in each company’s committee charter.

We should expect variation given the emphasis on financial materiality embedded in ESG, and thus the likelihood that different ESG issues may be material for different corporations.  However, the absence of specific identification of an ESG issue within a charter is notable for at least two reasons.  First, it may suggest an accountability gap because board-level committees may only receive information, or otherwise be especially focused, on issues specifically identified as falling within their oversight function.  Hence, boards and shareholders may need to be aware of the ESG activities emphasized in, as well as those left out of, these new  committee charters.  Specifically, they should make sure a company’s material ESG issues align with the ESG issues in its committee charter.  Second the absence may suggest a lack of legal protection.  Delaware cases on oversight have highlighted the importance of ensuring that board committees and their charters go beyond generic statements and  refer specifically to the issues over which boards have oversight, including ESG issues.[6]  Indeed, courts have made clear that one of the factors they will use to assess the adequacy of board-level oversight is the extent to which an issue is articulated in a committee charter and committee responsibilities.[7]   Such courts also have made clear that charters containing general statements related to oversight may be insufficient.[8]

Finally, and in light of the importance of committee charters to the board oversight and accountability function, the essay insists that the growing number of board committee charters reflecting oversight of ESG increases the likelihood that corporate attention on ESG will be long-term, thereby undercutting those who are predicting (are hoping for?) ESG’s quick demise.

ENDNOTES

[1] See Claire Hill and Brett McDonnell, Reconsidering Board Oversight Duties After the Financial Crisis, 2013 U. Ill. L. Rev. 859, 877 (“One of the canonical roles for boards is to monitor”); Hillary A. Sale, Monitoring Caremark’s Good Faith, 32 Del. J. Corp. L. 719, 733 (2007) (“Caremark and Stone make clear that monitoring and oversight are key to the good-faith obligations of fiduciaries and to the role of boards of directors as managers of managers.”).  See also, Center for Political Accountability, 2021 CPA-Zicklin Index of Corporate Political Disclosure and Accountability, at 20 https://www.politicalaccountability.net/wp-content/uploads/2021/11/2021-CPA-Zicklin-Index.pdf [hereinafter CPA Index] (“Board oversight is a vital component of accountability.”). See Marchand v. Barnhill, 212 A.3d 822 (2018).

[2] See PWC 2021 Annual Corporate Directors Survey, The Director’s New Playbook: Taking on Change, at 6.

[3] See In re Caremark Inc Derivative Litigation, 698 A.2d 959, 970 (Del. Ch. 1996); Marchand v. Barnhill, 212 A.3d 805, 809 (2019); In re Boeing Company Derivative Litigation, 2021 WL 4059934 (Del. Ch. 2021); In re Citigroup Inc. Shareholder Derivative Litigation, 964 A.2d 106, 120-21 (Del. Ch. 2009).

[4] See Marchand, 212 A.3d at 822; Desimone v. Barrows, 924 A.2d 908, 940 (Del. Ch. 2007) (dismissing oversight claim based on the existence of a properly formed and well-functioning audit committee); Guttman v. Huang, 823 A.2d 492, 506-07 (dismissing Caremark claim based on the existence of audit committee).  See also Hill and McDonnell, supra note __ at 865.

[5] See supra note 2.

[6] See In re Boeing, 2021 WL 4059934, at *5; In re Clovis Oncology, Inc. Der. Lit., 2019 WL 480188, *13 (Del. Ch. 2019).

[7] See In re Boeing, 2021 WL 4059934, at *5; In re Clovis, 2019 WL 4850188, at *13.

[8] See In re Boeing, 2021 WL 4059934, at *5; In re Clovis, 2019 WL 4850188, at *13.

This post comes to us from Professor Lisa M. Fairfax at the University of Pennsylvania Carey Law School. It is based on her recent essay, “Board Committee Charters and ESG Accountability,” available here.