Over the recent months, corporate America joined an increasingly global conversation on racial justice as growing public engagement prompted high profile statements from major brands affirming their commitment to diversity. Companies like JPMorgan, Nike, and Delta Airlines attempted to rise to the occasion by rhetorically embracing their customers’ and shareholders’ values on race. The problem, however, is that under the current law, investors and consumers have almost no legal recourse for holding companies to their promises.
To put this into perspective, the most recent expression of responsible corporate citizenship follows the much-discussed Statement on the Purpose of the Corporation that was published last fall by the Business Roundtable. Many popular and scholarly commentators characterized the Statement as a radical shift away from the narrow focus on corporate profit and shareholder primacy that has dominated the corporate zeitgeist for half a century. Some welcomed it as an embrace of stakeholder governance that would serve the welfare of communities, employees and the environment. Others, like Harvard Law School’s Lucian Bebchuk and Roberto Tallarita, have taken a more critical view. Their recent research has argued that the Statement doesn’t actually represent substantive change and that the main obstacles that would have to be overcome for a shift from shareholder primacy to stakeholder governance have not been addressed. The obvious conclusion is that such gestures are opportunistic at worst or superficial at best.
These iterations of the struggle for defining corporate purpose, while matched to the political tenor of the day, are not new to American public discourse. Since the 1970s, consumers have actively contested corporations’ obligations to their communities. Companies widely began adopting corporate social responsibility (CSR) policies at the height of the conscious consumer movement of the 1970s. The CSR initiatives demanded that companies reflect consumers’ values in their labor, supply chain, and other managerial decisions. However, these CSR initiatives haven’t turned out to be the panacea for corporate credibility that they were hoped to be. NGOs like Greenpeace have spent decades exposing the gaps between corporate sustainability claims and actual corporate behavior that falls far short of these claims. Consumers have mobilized boycotts and protests against corporate malfeasors, like the famous Nike campaigns during the 1990s that pushed the company to reform its sweatshop labor conditions. Shareholders have brought derivative lawsuits to hold corporate managers accountable for statements concerning their companies’ Environmental, Social and Governance (ESG) practices. These include high profile lawsuits against ExxonMobil for its misleading claims on climate change and against BP for its misleading claims on environmental risk management. In August 2020, shareholders brought some of the first lawsuits attempting to hold companies accountable for their commitments on race and diversity. Shareholders filed derivative suits against Facebook, Oracle and Qualcomm for failing to deliver on their public commitments to diversity.
Until now, such lawsuits have rarely yielded legal consequences for corporate management. Courts have generally maintained that a company’s non-financial statements, including its statements on environment and diversity, are not legally actionable and should be dismissed as mere puffery. This means that such statements are so general that no reasonable consumer or investor would rely on them when making decisions. The result is a glaring gap between what a company says and what it actually does.
This problem is the focus of my recent article with Dianne Strauss in the Berkeley Business Law Journal. Our work elaborates a misalignment between how investors deal with aspirational and forward-looking corporate statements and how courts treat such disclosures. We argue that as investors increasingly claim to rely on corporate ESG statements in their decision-making, these statements should become legally material in the courts’ interpretations. Today, investors and consumers claim to seek more from companies than just financial returns—a 2018 survey of global investors found that 82% of investors consider and incorporate ESG data when making investment decisions. More investors are choosing to put their money into funds that factor in a company’s ESG performance and commitments. In 2018, the volume of US domiciled assets under management incorporating sustainability strategies was reported at $12 trillion, comprising 26% of total assets under professional management. Corporate leaders are telling investors what they want to hear. If these words are to carry any weight, however, voluntary statements and PR gestures alone will not cut it—corporate promises and commitments will need to be redressable by law.
Aisha Saad is a Fellow of the Program on Corporate Governance at Harvard Law School.