Cleary Gottlieb Discusses How Companies Can Meet Fiduciary Duties When Speaking on Public Issues

Companies today face more pressure to speak on social and political issues than ever before. With the constant barrage of issues, the consequences of any course of action can be hard to predict. Speaking up can risk backlash for saying the wrong thing, but refraining from speaking at all may no longer be a reliable way to stay above the fray and avoid criticism. Companies may conclude that, when it comes to issues of great importance to their stakeholders, silence is no longer an option. One question that follows for boards and management, then, is whether they can break the silence without breaching their fiduciary duties.

Consider this now-commonplace scenario: The U.S. Supreme Court issues a ruling that is popular among some stakeholders but is considered morally problematic—perhaps even a cause for great concern—to other stakeholders. It may well be the case that the ruling bears directly on an issue of political significance with little or no obvious direct relevance for businesses or commercial conduct. Nonetheless, it will surprise no one when a company with major domestic operations is bombarded with feedback from its customers and employees expressing outrage at the ruling and demanding that the company take action in response. After much deliberation, the board and management reach a consensus that the company has no choice but to respond—if not to the Supreme Court, then at least to its own customers and employees. Can they do so in a way that is consistent with their fiduciary duties to act in the best interests of the company and its stockholders?[1]

While this is not a question that offers many easy answers, the following guideposts will help companies navigate this new terrain.

Take Account of Stakeholders

As with any decision, the guiding light for a company’s board and management should be the best interests of the company and its stockholders.[2] This does not mean, though, that a company is required to respond to political or social issues like controversial court rulings with a myopic view toward immediate stockholder return.[3] Courts have acknowledged that corporate fiduciary duties leave sufficient room for the board and management to consider the interests of non-stockholders like employees, customers and local communities, so long as these considerations are rationally related to the protection of long-term stockholder value.[4]

As companies continue to face both ESG issues and the backlash against them, they will do well to keep both stockholder and non-stockholder perspectives top of mind. For issues that are significant to the company as a whole, directors and officers can fulfill their fiduciary duties by actively engaging the issues. The task with each significant issue is to give it due consideration by weighing the key risks involved.

A company in the consumer goods sector may feel the most pressure to take action on topics that are meaningful to its customers, while an industrials company with predominantly commercial clients may determine that its relations with employees would suffer the most harm if the company declined to respond publicly on topics of importance to that constituency. A company’s standing in the surrounding communities can be equally important to consider, as can its reputation among politicians and regulators at the local, state and national levels. No company can succeed in the long run if it does not maintain good relations with each group of stakeholders, so there is often ample opportunity to draw the connection to long-term stockholder value. Of course, this is only the first step as difficult trade-offs must often be made in the near term, but weighing the key risks is exactly the sort of deliberations that a board should undertake when the company’s voice is used on significant matters for the company, including important ESG matters.

Consider Current Market Practice

Fortunately, the scenario described above is one in which the law affords significant latitude to directors and officers to rely on their experience with the company’s core constituencies in balancing their various interests. Unlike a corporate takeover scenario in which a court would evaluate board and management decisions with varying levels of heightened scrutiny, a company’s response to changes in law and other ESG issues in the ordinary course of business will typically be protected by application of the business judgment rule.[5] So long as the corporate decisionmakers are disinterested and independent (i.e., so long as they do not stand to derive any personal financial benefit from the decision), a court will defer to their judgments that are made in good faith absent unusual circumstances.[6]

Even with the latitude provided by the business judgment rule, though, making trade-offs among the company’s stakeholders is no easy task. The loudest voices are often singularly focused, and ignore the balancing act of opposing stakeholder interests that must be performed with any corporate decision. A steadier measure of how any decision will be judged is current market practice of the company’s peers and competitors.

If a controversial ruling puts a company’s employees in a significantly worse position than the one they were in previously, it is likely that other domestic companies are facing a similar predicament. The company’s decision to fund its employees’ travel to surrounding states in attempt to shield them from the worst consequences of the ruling, for example, will look much less extreme if several of the company’s main competitors are offering the same benefit. Instead, it may well be the bare minimum that is required for the retention of key employees that are needed to meet production targets. On the other hand, if the response called for by the company’s harshest critics has not been put into practice by any of the company’s peers, it is probably an indicator that there is less urgency in issuing a response.

Speak to Core Values

When companies do decide to speak on a controversial issue, they tend to tread carefully. But one thing that is often overlooked in the rush to get out a response is that inauthentic or insincere statements will ring false for everyone, even those that agree with them. On the other hand, companies that speak to their longstanding core values can often endure their harshest critics—as well as a court—even on issues for which consensus is hard to find.

Making an authentic statement on behalf of a company is a tall order, and typically requires a deep familiarity with the company’s brand, reputation and recent track record. This is where the business judgment of the board and management has its most utility. Directors and officers that can link the company’s response to the values that are already driving the company’s success will have the highest likelihood of achieving the desired outcome.[7] The company’s stockholders, customers and employees are already on board with the company’s mission, at least to some extent, and sincere statements that align with that will have the highest chance of maintaining their continued loyalty and commitment.

Integrate into Long-Term Success

The last step is perhaps the most important. Companies that speak on controversial issues will do well to expect at least some backlash—and to remember that backlash is something that can be managed. There are ways to increase the chances that the company’s chosen course of action will be upheld, both in a court of law and in the court of public opinion. The company’s board and management should think carefully to find ways in which the company’s response to a controversial issue can be integrated into the company’s practices and memorialized in the company’s policies.

Employees that believe their dignity will be protected by the company are less likely to leave for a competitor, and customers that believe in the company’s mission will return to the company when it is time to make another purchase. But, even more importantly, no company wants to become the scapegoat of politicians, commentators or plaintiffs’ attorneys, especially those that have an axe to grind. The best way to avoid this outcome, or to limit its negative impact, is to ensure that the company’s response to any high-visibility issue is directly justified in relation to the company’s longstanding commercial goals and achievements. And the best way for directors and officers to protect themselves in the face of stockholder litigation is give each significant issue due consideration when it arises.

It may be obvious to the board and management how their decision will promote the best interests of the company and its stockholders. And while the business judgment rule should protect decisions of this nature from undue interference by the courts, in the “20/20 hindsight” world of stockholder litigation, it never hurts to spell out what is otherwise an inference.

Conclusion

Speaking out on controversial issues is a daunting task, yet companies are being called to do so more and more. While the potential for foot faults abound, directors and officers who are guided by the above principles can fulfill their fiduciary duties and avoid the worst consequences of entering the political fray.

 ENDNOTES

[1] This memo describes the law in the State of Delaware, the state in which most Fortune 500 companies are incorporated. While many states look to Delaware as an authority on issues of corporate law, companies that are incorporated in other states should consult with local counsel to ensure that any relevant differences are taken into consideration.

[2] See, e.g., Revlon, Inc. v. Macandrews & Forbes Holdings, Inc., 506 A.2d 173, 181 (Del. 1986) (stating that fiduciary duties “require the directors to determine the best interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests.”) (citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985). See also Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 768 (2015) (“[A] clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare”).

[3] See, e.g., Simeone vs Walt Disney Co. 302 A.3d 956, 958–959 (Del. Ch. Jun. 27, 2023) [hereinafter Disney] (“Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues. Given the diversity of viewpoints held by directors, management, stockholders, and other stakeholders, corporate speech on external policy matters brings both risks and opportunities. The board is empowered to weigh these competing considerations and decide whether it is in the corporation’s best interest to act (or not act).”)

[4] Id. at 182 (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”) (citing Unocal, 493 A.2d at 955). See also Disney, 302 A.3d at 971(“The Board’s consideration of employee concerns was not, as the plaintiff suggests, at the expense of stockholders. A board may conclude in the exercise of its business judgment that addressing interests of corporate stakeholders—such as the workforce that drives a company’s profits— is “rationally related” to building long-term value. Indeed, the plaintiff acknowledges that maintaining a positive relationship with employees and creative partners is crucial to Disney’s success.”)

[5] See, e.g., Brehm v. Eisner, 746 A.2d 244, 264 (applying the business judgment rule in a suit challenging a president’s employment agreement and holding that “Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule. Irrationality may be the functional equivalent of the waste test or it may tend to show that the decision is not made in good faith, which is a key ingredient of the business judgment rule.”).

[6] See, e.g., Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) (“A board of directors enjoys a presumption of sound business judgment, and its decisions will not be disturbed if they can be attributed to any rational business purpose. A court under such circumstances will not substitute its own notions of what is or is not sound business judgment.”).

[7] To borrow an example from the takeover context, in Paramount Communications v. Time, the Supreme Court of Delaware held that the Time directors had acted in accordance with their fiduciary duties because, after an informed investigation, they concluded in good faith that their chosen course of action was the “best ‘fit’ for Time to achieve its strategic objectives” and allowed for “the preservation of Time’s ‘culture,’ i.e., its perceived editorial integrity in journalism.” 571 A.2d 1140, 1142 (Del. 1989). But see eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 33 (clarifying that “Time did not hold that corporate culture, standing alone, is worthy of protection as an end in itself” and that “[u]ltimately, defendants failed to prove that [their company] possesses a palpable, distinctive, and advantageous culture that sufficiently promotes stockholder value to support [the challenged decision,] the indefinite implementation of a poison pill.”).

This post comes to us from Cleary Gottlieb Steen & Hamilton LLP. It is based on the firm’s memorandum, “Meeting Fiduciary Duties When Speaking Up: A 21st Century Roadmap,” dated January 17, 2024, and available here. 

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