From holding CEOs accountable to mandating women on boards, some policymakers want to mandate that corporations do good.
For the first time since the Great Depression, companies are vulnerable to a range of proposed legislation that attempts to rein in what some believe are freewheeling behaviors allowed under the shareholder-comes-first model.
The growing number of initiatives that fall under the ESG umbrella of environmental, social and corporate governance issues shows a willingness among some policymakers to force companies and their directors to consider society's larger goals. What's more, there seems to be an increased appetite for punishing companies that fail to weigh the impact of their decisions on more than just maximizing shareholder value.
“People are less and less willing to give the corporate sector a pass,” says Robert Hockett, a professor at Cornell Law School who helped develop two ESG-related pieces of legislation introduced in the last session of Congress, including the Accountable Capitalism Act (ACA) and Stop WALMART Act.
Before long, boards could find themselves navigating an even more complex terrain of state, federal and international ESG laws and rules that will require directors to examine how their behaviors affect a wide-ranging group of constituencies or so-called stakeholders, such as employees, customers, suppliers and communities.
Is it a watershed moment when it comes to forcing companies to consider other stakeholders?
Matteo Tonello, managing director of ESG research at The Conference Board, seems to think so. It's a tipping point, he explains, “in the transition from the notion of the corporation as a vehicle that exclusively pursues shareholder value growth to the more sophisticated notion where the company is a nexus of key stakeholder relations that cannot be neglected without impairing the shareholder value growth objective.”
The most dramatic federal ESG bills are proposals that call for significant corporate reform measures impacting the internal workings of companies.
The two notable initiatives — ACA and Stop WALMART Act — provide a reference guide for what reformers are envisioning. Although they were erased from the books when the 115th Congress adjourned in January, the offices of the lawmakers who introduced the legislation indicate similar initiatives will be revived in the current Congress.
Already this year, U.S. Sen. Elizabeth Warren, a democrat from Massachusetts, has introduced the Corporate Executive Accountability Act seeking to ease the path for sending executives of large corporations to jail when their companies commit criminal and civil violations. The law would cover corporations with annual revenues of more than $1 billion.
“Corporations don't make decisions, people do, but for far too long, CEOs of giant corporations that break the law have been able to walk away, while consumers who are harmed are left picking up the pieces,” Warren said in a statement when the bill was introduced.
Any corporate executive could face prison time if an executive officer “negligently permits or fails to prevent” a host of social harms, including “any civil violation for which the company has been found liable or entered into a settlement agreement that affects the health, safety, financial or personal data of large numbers of people.”
The ACA, also introduced by Warren, in August, called for companies with revenues of more than $1 billion to be federally chartered. Under a U.S. charter, companies would have to consider the interests of all stakeholders, including employees and communities.
The bill would have required employees to select no fewer than 40% of its directors' seats. To encourage long-term thinking, directors and officers would have been prohibited from selling shares within five years of receiving them or three years from a company share repurchase. Before engaging in political expenditures, the company would have had to receive approval from at least 75% of shareholders and 75% of directors.
The Stop WALMART Act — or Stop Welfare for Any Large Monopoly Amassing Revenue from Taxpayers Act — was introduced by U.S. Sen. Bernie Sanders, an independent from Vermont, and Rep. Ro Khanna, a California democrat, in November. The bill would have prohibited company share repurchases unless all employees were paid at least $15 an hour, including part-time workers and independent contractors. Other restrictions on buybacks required employees to be granted up to seven days of paid sick leave. Finally, companies would have to ensure that CEO compensation was not more than 150 times the median pay of all employees.
Khanna says his office has been in touch with Sanders' office regarding reintroduction of the bill.
“We have every intent of updating and reintroducing this important piece of legislation. We will continue to work towards prioritizing a living wage for all,” according to Khanna's statement to Directors & Boards.
What's more, U.S. Sen. Chuck Schumer, a New York democrat, and Sanders are in the process of drafting a bill that appears to encompass provisions of the Stop WALMART Act and go further to include provisions about pensions and health benefits, according to an op-ed in the two penned for The New York Times in February.
Other brewing ESG initiatives have been centered on data privacy. In 2018, U.S. Sen. Ron Wyden, a democrat from Oregon, released a discussion draft of the Consumer Data Protection Act that would among other things:
• Create a “Do Not Track” system to let consumers stop third-party companies from tracking them on the internet by sharing or selling data.
• Fine violating companies for a first offense up to 4% of annual revenue and senior executive could face 10- to 20-year criminal penalties.
Keith Chu, spokesman for Wyden, says the senator plans to introduce the bill this year.
A portion of the bill that requires companies to “study and fix computer algorithms that result in inaccurate, unfair, biased or discriminatory decisions,” was broken out of the draft and was introduced in April as the Algorithmic Accountability Act, by Wyden; U.S. Sen. Cory Booker, a New Jersey democrat; and Rep. Yvette Clarke, democrat of New York.
Chances are directors will find themselves occupied in the short term mostly by these significant social and governance proposals rather than the environmental sector, explains Joshua Galperin, a professor at University of Pittsburgh School of Law and the special advisor for environmental law programs at the Yale School of Forestry and Environmental Studies
State legislators are also initiating ESG proposals that impact corporate board composition. At the vanguard are lawmakers in California, which in September passed first law mandating all publicly traded corporations headquartered in the state to have a certain number of women on their boards of directors, depending on the size of the board.
Other states are already following California's lead with board diversity initiatives, including New Jersey and Illinois.
Overall, boards should expect to see more ESG legislation in the coming year including the interests of all stakeholders, a move that many see as a reaction to and a reset of a shareholder-focused era.
“Every 50 to 70 years or so we seem to go through a fundamental re-think that reaches down to the very root to re-examine the underlying structures of our economy,” Cornell's Hockett says.
Maureen Milford is a Delaware writer focused on corporation law and governance matters.