First published in Nexus Magazine - https://www.law.utoronto.ca/documents/alumni/Nexus_fall07.pdf
By: Anita Anand
As we as a society become increasingly concerned about the erosion of our natural
environment, we also question means by which reform can be undertaken. Often in
these discussions, attention is focused on the corporation not only as the culprit of
existing environmental degradation but also the primary institution by which global
warming (and other problems) can be curtailed. However, these discussions are
sometimes based on superficial analyses of law, and indeed of the corporation’s role
as the basis of economic development and success. Can the corporation be made
more accountable within the confines of the current legal and economic system?
Can it realistically be viewed as an engine of environmental reform?
In the United States corporate law has historically been premised on what is called the shareholder primacy norm. This is the idea that directors owe a fiduciary duty to the shareholders of the corporation, whose interests are prime. In the words of Adolf Berle, directors must make their decisions “for the ratable benefit of all shareholders as their interest appears.” This norm is premised on the idea that shareholders are owners of the corporation and has often been interpreted as standing for the principle of shareholder wealth maximization. Where environmental or other policies are not wealth-maximizing, they undermine the shareholder primacy norm.
The applicability of the shareholder primacy norm in Canada is uncertain. To begin, the corporate statute states that the duty of the directors is to the corporation, not to the shareholders. Directors and officers must act honestly and in good faith. They owe this fiduciary duty to the corporation – indeed they must discharge this duty “with a view to the
best interests of the corporation.”
In People’s Department Store v. Wise, the Supreme Court of Canada confirmed the express language of the corporate statute, holding that the fiduciary duty is owed “to the corporation.” This meant that, on the facts of the case, no fiduciary duty was owed to creditors. However, more broadly, the Court rejected the idea that discharging the fiduciary duty means simply respecting shareholder interests. Rather, at all times, directors “owe their fiduciary obligations to the corporation, and the corporations’ interests are not to be confused with the interests of the creditors or those of any other stakeholder.”
The practical consequences of this holding for environmental groups and other stakeholders are enormous. The Court states that in discharging the fiduciary duty to the corporation, it may be legitimate for the board to consider the interests of any number of groups including “the interests of shareholders, employees, suppliers, creditors, consumers, governments
and the environment.” (emphasis added) The phrase “and the environment” has yet to be interpreted. But it appears that boards can take into account the interests of many constituents and their judgments will not be interfered with, so long as they make their decision honestly and in good faith. Arguably, the Wise decision may provide the
corporation with scope to adopt environmental policies that are not in fact profit maximizing for shareholders. But the law is not clear on this precise point.
Despite this ambiguity, we should recognize that market forces can cause and indeed have caused changes in corporate behaviour. To quote the Economist magazine, corporations world-wide are trying “to prove their greenness”. Toyota’s hybrid-engine is a prime example. General Electric’s “ecomagination” initiative under which GE attempts to develop environmentally conscious products, services and technologies is another. Shell is another company that has adopted sustainability policies which include voluntary reporting of emissions.
Why this increasing surge in environmental concern? Some say that corporations are trying to ward off mandatory regulation by adopting their own green policies. Another explanation relates to demand. Consumers are seeking out environmentally friendly products, and consumer demand in turn spills over into investor portfolios. Investors are investing heavily in socially responsible funds that focus not only on environmental but also on other causes (such as human rights). To meet investor demand, research groups (such as New Energy Finance) have cropped up that specifically focus on providing information and research to
investors in renewable energy, low-carbon technology and carbon markets generally.
The story about investor demand is really one about the corporation’s bottom line. A firm’s management or board may believe that if it fails to adopt environmentally friendly policies, investors will divest and take their money elsewhere, especially if other firms are readily adopting these practices. Firms thus attempt to respond to investors’ social conscience
as well as investors’ desire for wealth maximization. Notably, such a voluntary system may become more popular over time, leading clusters of firms to adopt environmental policies voluntarily. This clustering effect is a pure market mechanism that can occur without legal rules. This is what we are beginning to see among some corporations.
Corporate environmental accountability is on the rise as firms voluntarily implement greener policies. Thus it appears that the corporation as currently conceived can be an engine of environmental reform – certainly as long as investors (taking a broad conception of “value”) themselves demand such reform. Given the propensity for voluntary behaviour, legal rules relating to duties of directors and officers may not be as significant for environmental reform
as one may have first assumed.