What lies behind the iceberg?

In today’s world we are all part of the conversation – Environment, Social, oh and of course, Governance. I say it in that tone simply because when I ask directors ‘do you think you are compliant with good Governance practices?’ I get a blank stare (eyes rolling in their head while their minds think we have to be compliant, what is she pitching at?) response – yes, we are compliant, and compliance is the easy part of running the organisation. My response to them is often bewildering. ‘Oh, I say. No, I have absolutely no interest in compliance in the terms you suggest (i.e. a tick box that secretly I think you believe is a nuisance).’ I am interested in the directors of the board exercising more than just their fiduciary duties. I am interested in the practice of good governance and how their decisions impact all stakeholders – not just their shareholders. In today’s economic and political climate, we can no longer simply say as directors and officers ‘ahoy there! I see the iceberg and we will navigate in a way that still suits our profit margins or just be compliant with legalisation.’ Why? Because directors and officer know better and they should be acting with good practice of governance, considerate of the fiduciary duties to all their stakeholders that are impacted by their decisions around the issues of ESG. What the directors have not appreciated is what is coming behind the iceberg and that is litigation against company directors and offices for bad ESG practices and failure to consider the stakeholder.

In litigation the starting point has been  ‘are you a current sitting director of the company?’ The simple answer for accountability is if yes then you are likely to be held accountable for deeds done and failure to consider your fiduciary duties. There are of course exceptions both in terms of jurisdiction but also board minutes and the import role they play. The minutes will outline the decision take by the board of directors and also documents those directors that dissented from the main decision taken. (Please read the importance of board minutes) . What if you are no longer a director. Well this is not as straight forward as some articles suggest. When did the director/officer resign? What are the laws in the country in which the directors acted. Technically when a director leaves the fiduciary duty stops.  But then Governance and the laws around the organisation come into play where a directors is being sued by a stakeholder for a past decision where they had know or ought to have know that the companies activities would damage the planet and or its people. In most cases it has to be intentionally and deliberate, but what about the “I just didn’t know or realise the impact …” defence ? Well stakeholder can run the argument that ignore is not a defence and with the amount of information available today and the requirement to understand the supply chain and impact of the corporate actions on the supply chain and communicates as well the environment. I just don’t think for instance where in the USA for example a defence is often put forward as “business judgment rule” often insulated a director in terms of liability will be a feasible defence because good governance is good business judgments. This is where turning a blind eye and not taking action around issues of ESG leaves the board of directors wide open to what is heading behind the iceberg – litigation from stakeholders.

This is not a fanciful thought of trying to create litigation. This has already started. Recent examples include:

German Utility , RWE by a Periviam farmer (Mr Lliuya) This case involves a farmer the claimant who claims RWE knowingly contributed to climate change by emitting extensive volumes of greenhouse gases and as a result has to bear some responsibility for the melting mountain glacier near his town of Huaraz.

There is a growing awareness and concern that people that are often impacted by the decision of board of directors are the poorer people and legalisation is slow to catch up so people/stakeholders are now taking matters into their own hands.

What should the board be doing?

1. Ensure the ESG policy is updated and includes a diagram of stakeholders
2. Is there an ESG committee? There should be.
3. Has the board of directors requested from management their ESG concerns?
4. Is there a formal reporting and monitoring system in place that allows the CEO to identify ESG problems

Call Rashmi Dubé Partner gunnercooke to help navigate through ESG litigation prevention and claims.