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Climate change is one of the most important challenges facing society, the economy, and individual businesses. Two recent high-profile shareholder litigation cases have highlighted fundamental issues for corporate directors in their oversight of climate change risk management, raising key questions that have wide-ranging implications for businesses and beyond. First, who is responsible for managing climate change risk and setting corporate policy: shareholders or the board? And second, what is the relevant governance consideration for those policymakers: is it the risk of climate change to the corporation and its business, or is it the contribution of the corporation’s business to climate change?
Both pieces of litigation in question involve climate change advocates advancing their positions as nominal shareholders through corporate law mechanisms:
These cases confirm a corporate governance norm that directors, not shareholders, make policy decisions, even on matters of profound significance, and that corporate decision-making is primarily focused on the business and affairs of the corporation and is a matter for the directors’ business judgment.
ClientEarth, an environmental activist with a nominal shareholding in Shell plc, initiated a derivative action in the United Kingdom against the directors of Shell, alleging that the directors breached their duties by failing to pursue more aggressive energy transition plans. In the words of ClientEarth, it took “legal action to compel Shell’s Board to strengthen its climate transition plans, in the best interests of the company in the long-term”1. The litigation identified climate change as a corporate risk that the board of Shell is responsible for managing, and deployed the derivative action as a mechanism for remedying what it alleged to be harm to the company and, indirectly, to shareholders. The goal of the litigation was not to recover damages already caused to Shell by the board’s management of climate change risk, but rather to force the board to adopt what ClientEarth believed are better climate transition plans.
In substance if not in form, ClientEarth’s derivative action used shareholder litigation putatively, aimed at remedying harm to the corporation’s private interests to address public, climate-change-focused goals. After two hearings and an appeal, ClientEarth’s claim has failed.
As shareholder litigation focused on corporate climate change policy, ClientEarth’s claim faced numerous obstacles:
If these obstacles suggest that derivative action is an ineffective means of altering climate change policy, it may simply reflect the broader inaptness of shareholder litigation as a change mechanism. Along with shareholder voting, shareholder litigation is one mechanism for holding directors accountable for the way they manage the corporation’s affairs, particularly in regards to corporate performance and profit-seeking activities. But it may not be an effective mechanism for changing the way a corporation is managed in matters of public concern.
It might be tempting to look to shareholder litigation as a way of linking corporate affairs and broader social matters, but the link is evasive, highlighting a longstanding debate about the role of directors in managing corporate affairs that engage areas of public concern. In his classic article on shareholders’ derivative action published 50 years ago, Stanley Beck starts his analysis with comments on the role of the corporation more generally in economic life and society:
The large corporation, as the dominant economic institution of our time, is particularly being redefined. No longer is it seen as a private institution operating solely for profit of and answerable only to its one true constituency, its shareholders. It is realized that it is a public institution in the sense that its major decisions have a significant impact on the economy as do those of government and that its constituency, like government’s, is the entire citizenry whether in the guise of shareholder, worker, consumer supplier or simply user of clean air and water. And so a debate has ensued … as to how the large corporation should be governed and by whom, how it is to be made answerable to broader public concerns while ensuring a reasonable return to investors …2
Despite those provocative opening comments, Beck does not find in the derivative action mechanism a viable link between areas of public concern and the management of corporate affairs.
ClientEarth’s application for permission to pursue the proposed derivative claim was dismissed because it failed to disclose a prima facie case. At its core, the reasons of the UK court expose a fundamental problem with the theory of the case and the roles for directors and shareholders posited by ClientEarth for corporate decision-making: it is the responsibility of the board, not shareholders, to set corporate policy and the corporation’s approach to managing climate change risk. This is a responsibility the board carries out in accordance with the directors’ duties, and it is obliged to consider different stakeholder interests and act in the best interests of shareholders as a whole.
Litigation by a shareholder is not an apt tool for questioning that decision-making exercise. It is impossible to avoid the conclusion that ClientEarth’s real interest in this litigation was not the risk of climate change to Shell’s business, but rather the impact of Shell’s business on climate change.
This year, Exxon received a shareholder proposal from two climate change advocates with nominal shareholdings seeking to have shareholders vote on an advisory resolution requiring Exxon to accelerate its energy transition and disclose a new plan. Exxon resorted to litigation (which is still ongoing) for a determination as to whether it was required to include that proposal in its 2024 shareholder meeting disclosure. Even after the activists withdrew the proposal, Exxon persisted in the litigation, seeking to obtain a ruling which speaks not only to the specific shareholder proposal but also to the broader question about the roles of the board and management, on one hand, and shareholders, on the other, in directing the corporation’s policy on climate change. The central premises of the litigation are: (1) that, in the context of climate change risk, the activists are not interested in Exxon and its business; and (2) that corporate policy affecting the management of climate change risk, including energy transition, is a matter for the board and business judgment and not for shareholders voting in accordance with diverse, unaligned interests.
A legal basis for refusing to publish the activists’ shareholder proposal is that it deals with a matter of day-to-day management of the corporation. In its complaint, Exxon alleges that the activists’ proposal falls squarely within the business judgment of the board and is therefore not a matter for shareholder voting. Exxon alleges that what the activists really want is something that properly belongs to board decision-making: that is, fundamental change to corporate policy, contrary to the strategy and business interests of the corporation. Furthermore, Exxon alleges, the activists want that change not in order to promote the best interests of Exxon, but to promote a policy agenda at odds with those best interests. As with Shell, a very large majority of Exxon shareholders have endorsed the corporation’s energy transition plans and, Exxon alleges, activists with nominal corporate investments—obtained for the purposes of making a shareholder proposal—should not steer corporate policy or require the expenditure of resources involved in putting a proposal to all shareholders. Rather, Exxon alleges, developing corporate policy about energy transition and other aspects of climate change risk is a matter for directors to consider. As the complaint puts it, the activists’ proposal seeks to replace management’s “substantial expertise and well-considered business judgment with [the activists’] preferred approach to reducing [greenhouse gas] emissions”.
An amicus brief supporting Exxon, filed by the U.S. Chamber of Commerce and the Business Roundtable, put the governance issue in stark terms: “[b]lack letter corporate law provides that directors, rather than shareholders, manage the business and affairs of the corporation”3. The brief argues that the activists sought to use shareholder proposals and voting to upend this fundamental corporate governance principle.
Shareholder litigation and shareholder proposals may both prove to be ineffective mechanisms for driving corporate policy on climate change. The efforts of activists highlight that corporate governance norms will dictate decision-making in this area.
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