Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Board Consideration of a Specific ESG Demand/Issue – Certain Relevant Topics and Questions

Skadden, Arps, Slate, Meagher & Flom LLP

Marc S. Gerber Edward B. Micheletti Peter A. Atkins

(Annex to "Social Responsibility and Enlightened Shareholder Primacy: Views From the Courtroom and Boardroom.")

Are Any Directors Not Disinterested and Independent?

The board should inquire about this as a threshold matter in considering a specific ESG demand or issue. Questions include:

  • Does any company director have a material business, personal or other interest or relationship (e.g., as a director, significant contributor or public advocate) in or with a nonprofit organization advocating for the ESG issue, with which an alliance or to which a contribution is contemplated?
  • Does any company director have a position regarding the ESG issue under consideration (whether in support of or in opposition to it) that would impair the director’s ability to make a determination with respect to it, as a director, solely on the basis of what is in the best interests of the company’s shareholders?    
  • Have the identified interests, relationships and positions, if any, of directors been disclosed to the board?
  • Do any directors having any such interests or relationships control or dominate the board?

Note: Depending on the answers to the foregoing questions, it may be appropriate to consider recusing certain directors or delegating the primary responsibility for addressing decisions relating to the ESG issue under consideration to a standing or ad hoc board committee that is comprised of disinterested and independent directors (relative to that issue).

Gathering Information to Make an Informed Decision

Focus on the ESG issue under consideration and on the types and sources of information needed to address the issue. Questions include:

  • Is the demand to (1) take action in support of combating an ESG issue, (2) memorialize action taken, (3) disclose action taken or (4) undertake some combination?
  • Is the ESG issue one that has been confronted in the company’s business sector or in the company’s business itself, and is the board already familiar with it?
  • What types and sources of information have other companies identified? (In many cases, there will be useful precedent.)
  • Does the board need, or in any event would it be helpful for the board to hear from, outside experts on the ESG issue under consideration?
  • What information will be needed to assess whether a “sufficient nexus” exists between the ESG-related action under consideration and the best interests of the company’s shareholders? (Precedent from within and outside the company’s industry and/or business may exist and be helpful.)

Ensuring a Nexus Between the ESG Issue at Hand and Shareholder Welfare

Focus on whether, how and to what extent the specific ESG matter under consideration supports the company achieving shareholder value on a net basis (Potential Benefits). Questions include:

  • Whether, and if so how and to what extent, the ESG issue under consideration will positively impact the company’s business, financial performance and/or posture in the investment community, including:
    • the company’s relationship with current or potential customers, suppliers and strategic partners;
    • the company’s competitive positioning;
    • the company’s ability to recruit and retain a necessary, talented and motivated workforce at all levels;
    • the company’s ability to attract capital; and
    • investor interest in and support for the company’s stock.
  • To what extent are the Potential Benefits quantifiable?
  • What costs/risks might be associated with achieving Potential Benefits (Potential Detriments), and to what extent are they quantifiable?
  • Are there alternative or additional courses of conduct or approaches that might enhance the Potential Benefits sought or decrease the Potential Detriments?
  • Have boards of other companies identified the same or similar Potential Benefits and/or Potential Detriments associated with pursuing the ESG issue under consideration? If so, does that fact support the business judgment and rationality of the board if it were to pursue the same path?

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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