Abstract
The business judgement rule (BJR) has since the nineteenth century, helped set out the limits to the judicial review of company management decisions. Originating from common law courts, the BJR has spread across civil law jurisdictions, seeking to balance management’s expected actions and results, but it evolved into a comprehensive safety valve for directors. Based on the idea that companies should consider non-financial factors as part of their analysis process to identify material risks and growth opportunities, the rising of stakeholder capitalism is increasing the gap between traditional corporate governance doctrines regarding whose interests should directors pursue in their management decisions. By introducing additional stakeholders’ interests in companies’ activity, the consideration of environmental, social and governance (ESG) factors creates for investors and directors a new range of expected behaviours, reshaping the traditional management “duty of care” within the ordinary course of business. Notwithstanding, for effective enforcement of these new standards of performance, it is mandatory to simultaneously tackle and reshape BJR, since directors are directly appointed by shareholders and, apart from markets and public opinion’s judgement, most of the existing incentives are to follow only their controlling shareholder’s interests.
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Notes
- 1.
Caetano Nunes, O Dever de Gestão dos Administradores de Sociedades Anónimas, Almedina, 2012, pp. 256–270, with several references to American legal commentators and case law. This is also an old debate in Germany (Caetano Nunes, ob cit…, pp. 331 and ss.) and in Portugal, where the debate has been going on since the period before the Portuguese Companies Code (“PCC”) was enacted, and it is still subject to discussions (Caetano Nunes, ob cit… pp. 454 and ss.).
- 2.
Adolf A. Berle, “Corporate Powers as Powers in Trust”, in Hard Law Review, no. 44, 1930–1931, pp. 1049–1050 and “For Whom Corporate Managers Are Trustees — A Note”, in Hard Law Review, no. 44, 1932, pp. 1365–1372. Michael Jensen and William Meckling, “Theory of the Firm: Managerial Behavior Agency Costs and Ownership Structures”, Journal of Financial Economics 3, 1976, pp. 305–360.
- 3.
E. Merrick dodd, “For Whom Are Corporate Managers Trustees?”, in Harvard Law Review, no. 44, 1932, pp. 1145–1163. Milton Friedman, “A Friedman Doctrine—The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970, available at https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.
- 4.
Elizabeth Pollman, “Corporate Social Responsibility, ESG, and Compliance”, Draft of November, 2019, p. 9, available at www.ssrn.com.
- 5.
Elizabeth Pollman, “Corporate Social… cit., p. 2.
- 6.
Witold Henisz, Tim Koller, and Robin Nuttall, “Five Ways that ESG Creates Value”, in McKinsey Quarterly, November 2019, available at www.mckinsey.com.
- 7.
World Economic Forum, The Future of the Corporation Moving from balance sheet to value sheet, in collaboration with Baker McKenzie, White Paper, January 2021, p. 6, available at www.weforum.org.
- 8.
Elizabeth Pollman, “Corporate Social… cit., p. 5, available at www.ssrn.com.
- 9.
Caetano Nunes, O Dever de Gestão… cit., pp. 469 and ss.
- 10.
Bruno Ferreira, “Os deveres de cuidado dos administradores e gerentes (Análise dos deveres de cuidado em Portugal e nos Estados Unidos da América fora das situações de disputa de controlo societário)”, in Revista de Direito das Sociedades, I year, no. 3, Almedina, 2009, p. 709.
- 11.
Pais de Vasconcelos, “Business Judgement Rule — Deveres de cuidado e de lealdade, ilicitude e culpa e o artigo 64.º do Código das Sociedades Comerciais”, in DSR, no. 2, 2009, p. 12, Coutinho de Abreu, Responsabilidade Civil dos Administradores de Sociedades, IDET, no. 5, Almedina, 2007, pp. 22. Ricardo Costa and Figueiredo Dias, Código das Sociedades Comerciais em Comentário, vol. I, Almedina, 2010, p. 728.
- 12.
Ricardo Costa and Figueiredo Dias, Código… cit., p. 729.
- 13.
European Comission, “Inception Impact Assessment”, Ref. Ares(2020)4034032 - 30/07/2020, available at https://ec.europa.eu.
- 14.
Available at https://ec.europa.eu.
- 15.
An English translation is available at www.gesetze-im-internet.de.
- 16.
Menezes Cordeiro, “Os deveres fundamentais dos administradores das sociedades”, in ROA, no. 66, vol. II, 2006, available at www.oa.pt.
- 17.
Ferreira Gomes, Da administração à fiscalização das sociedades. A obrigação de vigilância dos órgãos da Sociedade Antónima, Almedina, 2015, p. 817, with references to Portuguese court decisions.
- 18.
Although the majority of the courts refer to breach of both the duties of care and loyalty, the actions reviewed concern the potential violation on the duty of loyalty, on which the courts typically concentrate their analysis. There is, however, an important STJ decision of 16.05.2000 (case no. 259/2000), available at Boletim do Ministério da Justiça, no. 497, 2000, pp. 396–405, regarding the analysis of the “diligence of a careful and orderly manager” and, in particular, concerning the duty to obtain information, prior to the 2006 amendments to the PCC.
- 19.
Melvin Aron Eisenberg, “The Duty of Care of Corporate Directors and Officers”, in University of Pittsburgh Law Review, vol. 51, 1989, pp. 945–949, available at https://lawcat.berkeley.edu, Dr Yoram Danziger and Omri Rachum-Twaig, “Re-Evaluating the Justifications for the Existence of an Independent Duty of Care”, in The Company Lawyer, no. 35, Issue 9, Thomson Reuters (Professional), p. 266, available at www.ssrn.com.
- 20.
Paulo Câmara, “O Governo das Sociedades e os Deveres Fiduciários dos Administradores”, in AAVV, Jornadas: Sociedades Abertas, Valores Mobiliários e Intermediação Financeira, Almedina, 2007, p. 167 and Pais de Vasconcelos, “Business Judgement Rule, p. 30.
- 21.
Bruno Ferreira, “Os deveres de cuidado… cit., p. 710.
- 22.
Menezes Cordeiro, “Os deveres fundamentais… cit., Paulo Câmara, “O Governo das Sociedades… cit. p. 166, and Bruno Ferreira, “Os deveres de cuidado… cit., p. 711.
- 23.
Bruno Ferreira, “Os deveres de cuidado… cit., p. 711, in which several references to national and foreign legal commentators were made. With a different classification, and analysing the duties of vigilance, inquiry and to be available all together, Coutinho de Abreu, Responsabilidade Civil…cit., p. 20.
- 24.
The existence of this duty was already highlighted by the STJ, in a decision of 19 November 1987, in BMJ 371 (1987), pp. 473–489.
- 25.
Perestrelo de Oliveira, Manual de Governo das Sociedades, Almedina, 2017, p. 233.
- 26.
Coutinho de Abreu, Responsabilidade Civil…cit., p. 21, highlighting, in particular, the importance of the decision, its urgency, costs of obtaining the information, and if the decision relates to the ordinary course of business or to the scope of extraordinary management.
- 27.
Ricardo Costa, “Responsabilidade dos Administradores e Business Judgment Rule”, in AA. VV., Reformas do Código das Sociedades, Colóquios no. 3/IDET, Almedina, Coimbra, março de 2007, p. 84. Coutinho de Abreu, Responsabilidade Civil…cit., p. 46.
- 28.
Calvão da Silva, “‘Corporate Governance – Responsabilidade civil dos administradores não executivos, da Comissão de Auditoria e do Conselho Geral e de Supervisão”, in RLJ, no. 136 (September–October), 2006, p. 55.
- 29.
Bruno Ferreira, “Os deveres de cuidado… cit, p. 729.
- 30.
Some Portuguese legal commentators consider this to be a level of diligence more intense than the civil law bonus pater familis, Luís Brito Correia, Os Admnistradores de Sociedades Anónimas, Almedina, 1993, p. 600, Gomes Ramos, Responsabilidade Civil dos Administradores e Diretores de Sociedades Anónimas Perante os Credores Sociais, Coimbra, 1997, p. 95, Coutinho de Abreu, Responsabilidade Civil…cit., p. 24 and 25 (note 36), Ricardo Costa, “Responsabilidade dos Administradores… cit., p. 78. Ferreira Gomes, Da administração… cit., pp. 730–731. Also, the Portuguese Supreme Court of Justice, in decisions of 28.02.2013 (case no. 189/11.3TBCBR.C1.S1) and of 30.09.2014 (case no. 1195/08.0TYLSB,L1.S1), available at www.dgsi.pt. Others consider that the civil law criterion should be adopted to the specific case, this being a concretization. Calvão da Silva, “’Corporate Governance’… cit., pp. 51–52.
- 31.
Perestrelo de Oliveira, Manual de Governo… cit, p. 233.
- 32.
Gomes Ramos, Responsabilidade Civil… cit., p. 92, Coutinho de Abreu, Responsabilidade Civil…cit., p. 24.
- 33.
Published at Caetano Nunes, Corporate Governance, Almedina, 2006, p. 37.
- 34.
Melvin Aron Eisenberg, “The Divergence of Standards of Conduct and Standards of Review in Corporate Law”, in Fordham Law Review, no. 62, 1993, pp. 462–464.
- 35.
D. Gordon Smith, “A Proposal to Eliminate Director Standards from the Model Business Corporation Act”, University of Cincinnati Law Review, no. 67, 1999, pp. 1203–1209.
- 36.
Luca Enriques, Henry Hansmann, and Reunier Kraakman, “The Basic Governance Structure: The Interests of Shareholders as a Class”, in Anatomy of Corporate Law—A Comparative and Functional Approach, Second Edition, Oxford University Press, 2009, p. 79. Although this argument is very criticized, since there are other specific areas (e.g. medicine) where this does not prevent judicial review, as explained by Ferreira Gomes, Da administração… cit., p. 838, with reference to the thoughts of Gevurtz.
- 37.
Coutinho de Abreu, Responsabilidade Civil… cit., p. 39.
- 38.
Luca Enriques, Henry Hansmann, and Reunier Kraakman, “The Basic Governance …cit., p. 79.
- 39.
According to the Principles of Corporate Governance of the American Law Institute.
- 40.
The same discussion exists regarding §93/I of the German Aktiengesets of 1965. Caetano Nunes, O Dever de Gestão… cit., pp. 322 and ss.
- 41.
Calvão da Silva, “‘Corporate Governance’…cit., pp. 53–57 and Menezes Cordeiro, “Os Deveres Fundamentais… cit, available at www.oa.pt.
- 42.
Coutinho de Abreu, Responsabilidade Civil…cit., pp. 42–43, and Paulo Câmara, “Governo das Sociedades e a Reforma do Código das Sociedades Comerciais, in Código das Sociedades Comerciais e Governo das Sociedades”, Almedina, 2008, pp. 50–53. Pais de Vasconcelos, “Business Judgement Rule”, p. 30 states that, in these cases, the law deems the acts done to be lawful.
- 43.
Ricardo Costa, “Responsabilidade… cit, pp. 64 and 73–79.
- 44.
Carneiro da Frada, “A business judgement rule no quadro dos deveres gerais dos administradores”, in Jornadas Sociedades Abertas, Valores Mobiliários e Intermediação Financeira, Almedina, 2007, pp. 223 and ss. and 230 and ss. Ferreira Gomes, Da administração…cit., p. 887. Caetano Nunes, O Dever de Gestão… cit., pp. 515 and ss., deciding not to enter in this discussion, states that it is a clause of “accountability exclusion”. Caetano Nunes, O Dever de Gestão… cit., pp. 515 and ss., deciding not to enter into this discussion, states that it is an “exclusion of accountability” clause.
- 45.
See Caetano Nunes, O Dever de Gestão… cit., pp. 462 and ss. and 517, as well as Ferreira Gomes, Da administração… cit., pp. 887 and ss., both with several references.
- 46.
“Governo das Sociedades Anónimas: proposta de Alteração ao Código das Sociedades Comerciais — Processo de Consulta Pública”, no. 1/2006, p. 18, available at www.cmvm.pt.
- 47.
Calvão da Silva, “’Corporate Governance’… cit., p. 57, Carneiro da Frada, “A Business Judgement Rule… cit., pp. 222, and Ricardo Costa, “Responsabilidade…cit, pp. 65 and 67 and ss. Others argue that the courts can judge the gross error, which are excluded from BJR’s scope. Menezes Cordeiro and Barreto Menezes Cordeiro, Código das Sociedades Comerciais Anotado, 3rd edition, Almedina, 2020, p. 356.
- 48.
Lisbon’s Court of Appeal, decision of 11.11.2004 (case no. 5314/06.3TVLSB.L1-7). The Portuguese Supreme Court of Justice (“STJ”), in a decision of 28.04.2009 (case no. 09A0346) also considered that directors should comply with the fundamental duties within the decision-making process. Both decisions are available at www.dgsi.pt.
- 49.
Ricardo Costa, “Responsabilidade …cit, p. 70 and Bruno Ferreira, “Os deveres de cuidado …cit, p. 725.
- 50.
Bruno Ferreira, “Os deveres de cuidado… cit., p. 726.
- 51.
It was mentioned, obtiter dictum, in the Aronso v. Lewis case by the Supreme Court of Delaware, that for the directors to benefit from the BJR, they would have to comply with the duty of obtaining information within the decision-making process. This was formally decided in Smith v. Van Gorkom case by the Supreme Court of Delaware, in 1985. Moreover, in Portugal, some legal commentators refer to an “adequate decision-making proceedings”. Menezes Cordeiro and Barreto Menezes Cordeiro, Código das Sociedades Barreto Menezes Cordeiro, Código das Sociedades… cit, p. 356.
- 52.
The dangers of short-termism have been highlighted for more than 40 year. Recently, Tim Koller, James Manyika, and Sree Ramaswamy, “The case against corporate short termism”, in Milken Institute Review 2017, available at www.mckinsey.com and Nicolas Grabar and Fernando Martinez, “The Short-Termism Debate” February 2021, available at https://corpgov.law.harvard.edu/. Additional references on Lucian Bebchuk, “Don’t Let the Short-Termism Bogeyman Scare You”, 2021, which part is available at https://corpgov.law.harvard.edu/, which has been trying to point out that short-termism is not necessarily dangerous.
- 53.
As emphasised, based on several studies, by Witold Henisz, Tim Koller, and Robin Nuttall, “Five Ways that ESG Creates Value”, in McKinsey Quarterly, November 2019, available at www.mckinsey.com. Susan N. Gary, “Best Interests in The Long Term: Fiduciary duties and ESG integration”, in University of Colorado Law Review, 731 (90), 2019, pp. 747 and ss.
- 54.
In August 2019, the Business Roundtable—a group of 181 prominent companies’ CEOs, including JPMorgan Chase, Amazon, Apple, and Walmart, among others—released a statement declaring that the purpose of the corporation no longer gives shareholders special consideration, but rather that companies should pursue the interests of customers, employees, suppliers, communities in which they work, and those of shareholders. The statement, in favour of the stakeholder’s capitalism, is available at https://www.businessroundtable.org.
- 55.
The European Commission has issued (i) Directive 2014/95/EU of the European Parliament and of the Council, of 22 October 2014, amending Directive 2013/34/EU, requiring large companies to report on their social and environmental impacts; (ii) Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. More recent and also very relevant, (a) Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (Disclosure Regulation); (b) Regulation (EU) 2019/2089 amending Regulation (EU) 2016/1011 (BMR) as regards EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks (Low Carbon Benchmark Regulation) and (c) Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation).
- 56.
Elizabeth Pollman, “Corporate Social… cit., p. 12, indicating as examples, UN Global Compact (UNGC), the Global Reporting Initiative (GRI) Standards, and the Organization for Economic Co-Operation and Development’s (OECD) Guidelines for Multinational Enterprises.
- 57.
The Task Force’s 32 international members, led by Michael Bloomberg, include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies.
- 58.
The 2017 TCFD recommendations report is available at fsb-tcfd.org/publications/.
- 59.
The European Authorities published their reports in December 2019 and they recommended strengthening disclosure of ESG factors to facilitate institutional investor engagement. They are available at https://ec.europa.eu/.
- 60.
Also available at https://ec.europa.eu/.
- 61.
As explained by Mark J. Roe, Holger Spamann, Jesse M. Fried and Charles C.Y. Wang, “The European Commission’s Sustainable Corporate Governance Report: A Critique”, in ECGI Working Paper Series in Law, Working Paper N° 553/2020 November 2020, available at www.ssrn.com, with several references to legal and financial studies.
- 62.
Commissioner Hester M. Peirce, “Markets, Morality, and Mobsters: Remarks at the 18th Annual Corporate Governance Conference”, speech on 27.08.2020, available at https://www.sec.gov/news/speech/peirce-markets-morality-mobsters-2020-08-27.
- 63.
As explained by Catarina Serra, “The New Company Law: Towards a Responsible Corporate Governance”, in Scientia Iuris, Londrina, v. 14, November 2010, pp. 162–169.
- 64.
Paul Barnett, “The Shareholder v Stakeholder False Dichotomy”, August 2016, available at https://www.linkedin.com/pulse/shareholder-v-stakeholder-false-dichotomy-paul-barnett/ and John Gerard Ruggie, “Corporate Purpose in Play: The role of ESG Investing” Draft chapter for Sustainable Investing: A Path to a New Horizon Edited by Andreas Rasche, Herman Bril & Georg Kell, p. 12, available at www.ssrn.com.
- 65.
Gerard Ruggie, “Corporate Purpose… cit., p. 12.
- 66.
See “Study on directors’ duties and sustainable corporate governance — Final report”, prepared by Ernst & Young (EY) for the European Commission DG Justice and Consumers, available at www.europa.eu. This report identified the following seven key problem drivers, including (i) directors’ duties and company’s interest tending to favour the short-term, (ii) companies failing to identify and manage relevant sustainability risks and impacts, (iii) long-term interests of stakeholders not being incentivised by corporate governance and (iv) limited enforcement of the directors’ duties. The report then proposes that the EU should act and proposes three ways of doing so (two of soft law and one of hard law).
Strong critics of this report are Mark J. Roe, Holger Spamann, Jesse M. Fried and Charles C.Y. Wang, “The European Commission’s…cit., who conclude that “The Report fails on every important dimension. It does not define the problem properly, presents inapposite evidence, fails to address, or even cite the relevant academic research, and neglects elementary problems with its policy proposals. No EU policymaker should rely on this Report”. They also state that “(…) changing the jurisdictional status here is unlikely to have a discernible impact. The better way to deal with this recognition is to accept this and other evidence—not cited in the Report—that such formulations are unlikely to make a meaningful difference”.
- 67.
Against this, Jr. Leo E. Strine, Kirby M. Smith and Reilly S. Steel, “Caremark and ESG, perfect together: A practical approach to implementing an integrated, efficient, and effective Caremark and EESG strategy”, in Harvard Law School, Discussion Paper no. 1037, Cambridge, 07/2020, available at www.ssrn.com, who, instead of adding a new component to the traditional fiduciary duties of loyalty and care, situate ESG within the established legal framework and propose a way for boards to address the demands of ESG and compliance in an integrated, efficient, and effective way.
- 68.
Other national legislation was already enacted regarding ESG factors, but not specifically regarding directors’ duties: (i) Decree-Law no. 89/2017 of 28 July, on the disclosure of non-financial information and information on diversity by large companies and groups, which transposes the Directive 2014/95/EU; and (ii) Law no. 62/2017 of 1 August, on the balanced gender representation in the management and supervisory bodies of the public sector entities and listed companies, providing certain thresholds for the appointment of members of each gender for those corporate bodies.
- 69.
On 10 March 2021, the above-mentioned Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector became, in its majority, directly applicable in the legal systems across the European Union, including in Portugal. This Regulation establishes certain harmonised transparency rules applicable to financial market participants and financial advisers in relation to the management of the financial risks arising from climate change, resource depletion, environmental degradation and social issues. It thus imposes the consideration of ESG factors in their investment decisions and sets out certain transparency duties in the way financial market players take into account sustainability risks in their investment decisions or in their investment advisory activities.
- 70.
Martin Lipton, “It’s Time to Adopt the New Paradigm”, in Harvard Law School Forum on Corporate Governance, February 2019, available at https://corpgov.law.havard.edu.
- 71.
No impact is expected on the duty to be available.
- 72.
As explained by Martin Lipton, “It’s time… cit., these mechanisms to be placed must aid employees to “seek guidance and alert management (…) about potential or actual misconduct without fear of retribution”.
- 73.
John W. White, Matthew Morreale and Michael Arnold, Responding to the ESG Paradigm Shift: Practical Steps for Boards and Management, Cravath, Swaine & Moore LLP, March 2021, p. 3, available at https://www.cravath.com.
- 74.
John W. White, Matthew Morreale and Michael Arnold, Responding… cit., p. 3.
- 75.
Also, Coutinho de Abreu, “Deveres de cuidado e de lealdade dos administradores e interesse social”, in Reformas do Código das Sociedades, Almedina, 2007, pp. 46–47, Carneiro da Frada, “A Business Judgement Rule… cit., pp. 216–217), and Catarina Serra, “The new Company Law… cit., p. 168.
- 76.
Dr Yoram Danziger and Omri Rachum-Twaig, “Re-evaluating the Justifications for the Existence of an Independent Duty of Care”, in The Company Lawyer, no. 35, Issue 9, Thomson Reuters (Professional), p. 267, available at www.ssrn.com.
- 77.
Caetano Nunes, O Dever de Gestão… cit., p. 491.
- 78.
Catarina Serra, “The new Company Law… cit., p. 168.
- 79.
Karl Larenz, “Metodologia da Ciência do Direito”, translated by José Lamego, 6th edition, Gulbenkian, 2012 (1991), p. 586 and André Figueiredo, “O princípio da proporcionalidade e a sua expansão para o Direito Privado”, in Estudos Comemorativos dos 10 anos da Faculdade de Direito da Universidade Nova de Lisboa, vol. II, Almedina, p. 2008, pp. 25 e ss.
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Ferreira, B., Sequeira, M. (2022). Business Judgement Rule as a Safeguard for ESG Minded Directors and a Warning for Others. In: Câmara, P., Morais, F. (eds) The Palgrave Handbook of ESG and Corporate Governance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-99468-6_14
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