June 18, 2014

Redefining Corporate Sustainability and Responsibility — A New Paradigm


Corporate fiduciaries have a well established duty to maximize shareholder wealth, which is the legal standard of governance for Oregon businesses. They also have wide discretion in discharging their duties, provided they act in a manner they reasonably believe to be in the best interests of the corporation. ORS 60.047 was amended in 2008 to statutorily recognize that the best interests of a corporation may be to conduct business in a manner that is "environmentally and socially responsible." This statutory expression of authority, although not inherently in conflict with a shareholder's interest, embraces emerging corporate sustainability and social responsibility concepts known as triple bottom line reporting ("TBL") and "gearing up," and limits shareholder suits that could result from a corporation's adoption of TBL and gearing up principles.

The courts will generally defer to the judgment of corporate fiduciaries on matters believed to be in the best interests of the corporation; that judicial deference is known as the "business judgment rule." That rule allows private corporations to be charitable donors, to sponsor environmental and social causes, and so on. While some commentators believe the deference provided by the business judgment rule is so broad as to swallow the duty, the new statutory provision further limits the risk in making decisions based on environmental and social factors.

The TBL sustainability framework measures environmental and social justice impacts along with economic performance. Under TBL, a corporation may define which interest groups it is responsible to and may consider a broader set of impacts. Interestingly, some TBL writers assume that its implementation is a repudiation of the duty to maximize shareholder wealth. Gearing up is a strategy explicitly employed by Nike, and is designed to take a company through various stages until sustainability becomes a catalyst for growth and innovation. Neither of these concepts is patently in conflict with the business judgment rule and the duty to maximize shareholder wealth, but depending on implementation, such strategies may impair short-term profits or be seen by shareholders as not being in the best interests of the corporation, risking shareholder suit. Consideration of the concerns of nonshareholder interest groups also increases that risk. The extent of conflict depends on the timing and scale of implementation of TBL practices.

Further support for TBL and gearing up principles is pending in proposed legislation, HB 2829. In its current form, the bill would amend Oregon's "other constituency" statute to extend its applicability beyond the takeover context and explicitly authorize directors to consider non-shareholder constituencies and factors in making all decisions of the corporation, provided that the decisions are appropriate to the responsible conduct of the corporations business. In its current form, HB 2829 appears to be consistent with the current state of the law, but like ORS 60.047, it would have the effect of protecting fiduciaries for decisions made based on other TBL or gearing up criteria.

Although a corporation can reasonably embrace sustainable environmental practices and address social responsibility issues within the scope of the business judgment rule with minimal legal risk, if TBL or gearing up strategies are adopted, clearly defining and limiting the benchmarks and objectives is suggested to avoid unintended consequences and interpretations that could adversely affect the company. Care should be taken to maintain the relationship of the strategies to the corporation's business, and consideration of the interests of nonshareholder interest groups should be addressed with substantial caution.

There is a movement toward a new paradigm of corporate sustainability and responsibility and the TBL or gearing up models, but such practices must be related to the business and conduct of the corporation. Oregon law provides some protections for corporate fiduciaries that elect to implement the new practices, but good deeds rarely go unpunished, and not all facets of these concepts have been tested. Should a corporation decide to adopt such practices, it should recognize the risk and novelty, consider whether it directs or authorizes the practice, carefully define the scope of the practice, and give careful consideration to fulfilling current shareholder expectations.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.


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