Globally, businesses are coming more and more under the watchful eye of the public and the national and supranational authorities for their environmental, social, and governance (ESG) performance (1). Businesses are required to track a wide range of non-financial performance measures, such as employee satisfaction, the quantity of pollutants they produce to the effectiveness of their corporate governance.
Organizations are now more vulnerable to compliance risk than ever before as a result of the proliferation of international regulations and rising stakeholder expectations. Compliance risk specifically refers to the danger that infractions of laws, rules, codes of conduct, or organizational standards, such as EU’s Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004; Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment through criminal law; and the more popular Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the protection of natural persons with regard to the processing of personal data by the Union institutions, bodies, offices and agencies and on the free movement of such data, more popularly known as GDPR (2,3,4).
Hereto in this paper will be highlighted positive and negative examples of good ESG performance, and how bad governance can lead to D&O Litigation.
First, we shall look at a case which could be considered groundbreaking because this action may represent the first ever effort to hold a board of directors personally accountable for failing to adequately plan for the net-zero transition.
The environmental law firm ClientEarth, a Shell shareholder, announced on Tuesday that it notified Shell of their claim against the 13 executive and non-executive directors of the corporation. ClientEarth claims that the board has failed to uphold its obligations under English law by failing to implement a climate policy that fully adheres to the historic Paris Agreement (5). This could also be considered a breach of fiduciary duty, which occurs when the fiduciary acts in the interest of themselves rather than the interest of the employer or principal.
Another example of bad ESG practices are the multiple lawsuits that have been filed against the chief operating officer and the CEO of Facebook (now renamed to and hereinafter META) in regard to data privacy.
There are several Class action lawsuit filed against META, of which the most significant are O’Kelly v. Facebook Inc., et al; Price v. Facebook, Inc. et al; Comforte et al v. Cambridge Analytica; Renken, et al, v. Facebook, Inc., et al. All of the beforementioned lawsuits are in regard to invasion of privacy and unlawful business practices concerning personal data use and distribution. These misconducts in regard to implementing adequate regulations to secure the users data results in bad reports of corporate governance and user care.
On March 23, Ronald Martin, a shareholder in META, filed a complaint in connection with the class action litigation Price v. Facebook et al. Martin is bringing legal action against META, its CEO Zuckerberg and board members: Thiel, Andreessen, Bowles, Desmond-Hellmann, Hastings, and Koum. The defendants are accused of misusing business assets and breaching fiduciary duties in the stockholder lawsuit (6).
An example for good ESG reporting and implementation is the graphics processing units manufacturer – Nvidia. The company continued paying vendors and contractors even while facilities were closed due to COVID-19 thus raising trust among all the beneficiaries and stakeholders, and making an image of a stable and fiscally responsible company. As a result of this, the overall annualized return to stockholders for Nvidia over a ten-year period exceeds 50%. Revenue increased by 61% to $26.91 billion for the 2022 fiscal year, and GAAP EPS increased by 123% to $3.85.
Another instance for good ESG reporting is the swimming pool supplier “Pool”. The firm features Eco Select products and is a participant in the EPA’s WaterSense program. The company makes information available to customers to encourage responsible water and wastewater management. Along with making donations to charities like the National Forest Foundation and human rights organizations, Pool provided free swimming lessons for kids. The aforementioned steps taken by the company contribute to building a good public image of a company that is involved in the daily life of the community and all stakeholders. The company’s 12 month EPS ending March 31, 2022 was $17.96, a 68.8% increase year over year. Pool’s 10-year annualized total return is almost 30% (7).
After reviewing and examining the risk of improper ESG reporting & implementation and by going through the aforementioned lawsuits against D&O which is a result of improper ESG reporting & implementation, it can be concluded that investing in a good ESG portfolio will mitigate and prevent the threat of D&O litigation and furthermore make a company more competitive and attractive on the open market.
SOURCES:
Kiril Petrovski, is a lawyer and a sustainability consultant at ESG PRO. He obtained his master’s degree in corporate law, which he passed with distinctions and is currently in the final stages of acquiring a PhD in the field of Public Health. He has accumulated experience in the field of administrative management through work in several public bodies. His specialty is on social matters and corporate governance. Kiril believes that every challenge must be approached from every direction with the aim to create long lasting, all-encompassing and practical systematic solutions.
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