The debate on corporate purpose is often grounded on an assumption that there is one right model of corporate purpose for all companies. Yet some companies have a much more significant impact on stakeholder groups than others. Just 90 corporations, such as Chevron, Shell, and BHP (the so-called “carbon majors”), are responsible for 63 percent of the carbon dioxide and methane emitted between 1751 and 2010. This staggering figure highlights that carbon majors are different from other companies. However, the corporate governance to which they are subject is notmaterially different from that of any other firm and revolves around the idea of shareholder value maximization (SVM). In a recent paper, we advance two claims. First, the corporate governance of carbon majors cannot be centred only on SVM. Second, a tailored regime of “climate corporate governance” could induce carbon majors to pay greater attention to the negative externalities that they cause.

We start by demonstrating that there are no theoretical justifications for carbon majors to have a corporate governance regime designed around SVM. The traditional focus on SVM is premised on two fundamental axioms: mutualism and separability. Mutualism is the idea that shareholder value can only be created by generating value also for other stakeholders. Separability refers to the distinct roles of corporations and policymakers: The former are responsible for creating wealth; the latter for preventing or redressing the negative externalities created by corporations in the pursuit of wealth.

Neither axiom holds true for carbon majors. First, mutualism fails because most of the damage from climate change will be felt by future generations, which cannot contract with corporations or sue in court. As a result, carbon majors are not held accountable for their behavior and increase shareholder wealth at the expense of future generations. Second, separability fails because tort law, regulation, carbon pricing, and policymakers’ other tools for redressing the externalities created by carbon majors are inadequate or hard to implement and administer.

As an alternative to SVM, we offer climate corporate governance. Given differences among jurisdictions, rather than make detailed proposals for reform, we offer general and adaptable rules and standards for a climate corporate governance regime.

Director Duties. Directors’ duties send the clearest legal signal to corporate managers. We suggest that directors of carbon majors be subject to a climate duty requiring them to balance shareholder value and their companies’ impact on the environment. Under our proposal, directors would breach their climate duty when the expected value created for their shareholders is smaller than the social cost of carbon imposed on society. The goal of the climate duty would be twofold: to counter the idea that directors of carbon majors are responsible only for pursuing profit and to prevent conduct with a negative impact on the environment that is greater than the benefits accruing to shareholders.

Climate Directors or Observers, Shareholder Proposals, Executive Remuneration. In addition to directors’ duties, climate corporate governance would use director elections, shareholder proposals, and executive remuneration to protect against damage to the climate. One oft-cited reason that directors’ and shareholders’ interests are essentially aligned is that shareholders generally appoint (and remove) directors and (albeit indirectly) management. Therefore, we propose having some members of a board of directors (climate directors) elected by constituents other than shareholders, and in particular by actors with a clear interest in environmental issues. Alternatively, policymakers could consider the lighter approach of granting non-shareholder climate constituents the right to appoint board observers (climate observers). Although these observers would not have formal voting rights, they could promote stronger compliance with the climate duty by overseeing board decisions.

Furthermore, we note that in many jurisdictions, shareholders who wish to bring forward climate-related proposals encounter significant hurdles like the UK’s minimum 5 percent shareholding requirement. We argue that such obstacles should be removed, or at least reduced,  for shareholders of carbon majors.

Finally, executive remuneration influences managers’ behavior through financial and other incentives, and we highlight the need to review and align the design of executive compensation plans with the proposed climate duty. Since shareholder say-on-pay votes are likely to constrain the efforts of directors to create such alignment by giving shareholders a channel for communicating their preferences regarding the incentive structure of executive compensation to the board , governments may need to repeal say-on-pay votes partially or fully for carbon majors.

We do not underestimate the challenges of implementing climate corporate governance for carbon majors, but the need for it is urgent. By redefining directors’ duties, strengthening stakeholder involvement in governance, and aligning executive incentives with climate goals, carbon majors can take the necessary first steps toward more responsible and sustainable practices.

This post comes to us from professors Matteo Gatti at Rutgers Law School, Suren Gomtsian at the London School of Economics Law School, and Alessandro Romano at Bocconi University – Department of Law. It is based on their recent paper, “Corporate Governance for Carbon Majors,” available here.