By now, readers are well aware that ESG has become a politically divisive issue. In a series of variations on this theme, two conservative legal commentators, writing in a Wall Street Journal op-ed column, argue that ESG is a trojan horse for progressive political objectives that, if Delaware’s courts continue their current course, could cost the state its privileged position as the preferred jurisdiction for corporate organization. The November 25, 2023 Journal op-ed, which was written by former U.S. Attorney General William Barr and Washington Attorney and former Department of Labor official Jonathan Berry, and is entitled “Delaware is Trying Hard to Drive Away Corporations,” can be found here.
The authors begin their article by asserting that in the early 20th Century, New Jersey had been a preferred jurisdiction for incorporation, but that progressive-era trust busting under then-Governor Woodrow Wilson caused corporations to flee the state. Delaware, the authors contend, through its courts’ diminution of shareholder primacy principles of corporate laws in their embrace of a progressive ESG agenda, risks similarly causing companies to leave for other jurisdictions.
Delaware, the authors suggest, is “falling in line with other blue states in embracing ESG, which rejects shareholder value as corporate law’s lodestar.” Delaware, along with other blue states, the authors suggest, are “using ESG to inject the progressive political agenda on climate, race, and other issues of corporate governance.” Delaware’s time-honored “reputation” of “scrupulously deferring to companies’ good-faith pursuit of shareholder value” may, the authors suggest, be a thing of the past. Not only its politicians but its “corporate-law elder statemen today advocate that the state should adopt a more assertive and explicitly pro-ESG corporate law.”
What is the source of the authors’ concern? Apparently, it is recent developments in Delaware case law involving the Caremark doctrine, often also referred to as the duty of oversight for corporate boards. The authors suggest that Caremark claims are “increasingly succeeding, and thus have proliferated on the court’s docket.” The legal shift, the authors suggest, has “political implications,” as the board-level Caremark “risks” that plaintiffs’ lawyers are advancing “correspond to du jour ESG issues like climate change, DEI, and #MeToo.” As the ESG-based logic takes hold, the authors contend, “expect Delaware law to elevate issue activism steadily over old-fashioned shareholder value through corporate law.”
Which Caremark cases do the authors have in mind in support of their argument that ESG activism is overcoming traditional principles of shareholder primacy? Well, it isn’t “cases,” it is just one case. Surprisingly, the one case is Vice Chancellor Lori Will’s June 2023 decision in the Disney case, in which she rejected a Disney shareholder’s books and records request, holding that the shareholder had failed to sufficiently allege potential board wrongdoing when the company publicly opposed Florida’s Don’t Say Gay legislation. (I discuss Vice Chancellor Will’s decision at length here.)
Vice Chancellor Will’s decision disallowing the books and records request is, the authors suggest, “significant because it foreshadows the completed evolution of Delaware law.” Disney, the authors contend shows that “companies not in step with ESG will have litigation risk under Caremark; companies that go overboard will be free from accountability.” The “clear signal,” the authors suggest, is that “Delaware’s commitments to both board-level deference and shareholder value will bend to accommodate ESG.”
These developments, the authors suggest, give rise to an “opportunity for red states that oppose ESG.” Texas, Georgia, Utah, and Wyoming have recently set up their own designated business courts. These state and others can “capitalize by developing an efficient alternative that upholds shareholder value. States’ corporate laws “compete in a market,” and Delaware may soon learn that its moves are boosting its state competitors.
The authors’ position reflects an overtly political perspective, demonstrating how ESG has become one more manifestation of the polarized divide that increasingly characterizes our current social culture.
An interesting part of the authors’ analysis is their contention that the way that Delaware’s corporate laws has been captured by progressive political forces in order to advance their ESG agenda is through the use of Caremark claims.
To be sure, in a series of cases staring with the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill, Delaware’s courts have proven to be more receptive to Caremark claims than in the past. However, the evidence in thin on the ground for the argument that Caremark claims are somehow being used as a Trojan Horse to smuggle in a progressive ESG agenda.
Marchand itself, for example, involved a listeria outbreak at an ice cream manufacturer. Another important recent Caremark case, the Boeing case, involved the company’s high-profile airline crashes. These are not ESG agenda cases.
And with respect to the McDonalds case, which did involve sexual harassment and discrimination allegations, and so maybe could be characterized being ESG-related I suppose, doesn’t really support the authors’ point because the Caremark case against the McDonalds board was dismissed, and the claim was only sustained against one corporate officer due to what can only be called egregious facts (“When a corporate officer himself engages in acts of sexual harassment, it is reasonable to infer that the officer consciously ignored red flags about similar behavior by others.”)
Curiously, the only example the authors cite is the Disney case, which seems like an unusual choice to try to support their position. For starters, the Caremark claim in the Disney case was not sustained. It just seems odd to me to try to argue that corporations are going to start leaving Delaware because a Caremark case was not sustained. Some observers might say that corporations might in fact be relieved to know that the Caremark claim against the Disney board was not sustained.
Even more to the point, the gist of Vice Chancellor Will’s opinion is her conclusion that it is not for courts to question boards’ judgments about what it best to promote shareholder value, adding that a board may reasonably conclude that making business judgments about non-shareholder interests is reasonably related to building long-terms shareholder value.
Perhaps the authors don’t like the outcome because they don’t like the political position that Disney took, but I think there is a pretty good case to be make that Vice Chancellor Will’s opinion in the case is in fact built around traditional principles of shareholder primacy and board-level deference. Again, it is hard for me to imagine any company deciding to leave Delaware because a judge gave deference to board-level decision making about what is the long-run interest of shareholders.
The irony here is that I think there are sound non-political reasons to question the continued use of ESG as a catchall expression for an assortment of topics, interests, and causes. In a recent post, I specifically raised the question of whether or not it might be time to say RIP to ESG. Among the many reasons why I think “ESG” may have outlived its usefulness is that, whatever it may have originally been meant to be, it has effectively become a convenient handle for certain politicians and others to grab so as to use the term as a kind of cudgel in the ongoing culture wars, while in the meantime a rational discussion of the underlying concerns – climate change, social justice – is suppressed.
It is funny; I would have thought that the conservative position here would have been that corporate boards should not be punished for failing to adhere to a particular political orthodoxy. That happens to be my view. And it was in a way one of the authors’ initial starting points. But where they end up – by arguing in effect that Disney’s board should have been held liable – is saying that corporations will be happier in states where corporate boards can be punished for failing to adhere to a certain political orthodoxy, as long as it is the authors’ preferred political orthodoxy.
Delaware Vice Chancellor Travis Laster posted a strong rebuttal to the authors’ contentions in a LinkedIn column, here.
For a much more detailed and more academic analysis of the authors’ op-ed column, please see UCLA Professor Stephen Bainbridge’s post on his ProfessorBainbridge.com blog, here.