This article and the information therein do not provide legal advice, are not intended to provide legal advice, and are provided for general informational purposes only.
Motivated by legal and regulatory requirements, as well as by financial incentives for taking voluntary actions, many companies are embracing more proactive risk-management methods and building sustainability practices into their business models.
In recent years, corporations have begun to voluntarily adopt sustainability measures to better manage risk and respond to more-educated investors in an increasingly transparent, more-connected world.
This article provides an overview of why companies are adopting these voluntary programs, the risks companies are balancing, and what to expect with the new U.S. administration.
To understand why a company would voluntarily adopt sustainability practices, it is helpful to examine the concept of risk. Risks include the rather obvious risk of a catastrophic event, such as a plant explosion; more-remote, but recently better defined, risks, such as supply chain disruptions due to rising sea levels; and the more ambiguous risks related to “doing the right thing.”
Because of technological advancements, previously undefined and seemingly remote risks can now be observed and quantified. As risk sharpens into focus, investors are becoming more aware of risks and have started to support more targeted investor activism. In turn, companies are reevaluating their approaches to risk management and investing more aggressively in managing a wider range of risks.
Corporate risk management: The basics
Risk to corporations in the U.S. arises from the demands of complying with the law of corporations itself, as well as a corporation’s duty to comply with other laws, including environmental laws. Corporations must also consider general business risks such as market trends, competition, general economic conditions, conflicts (e.g., war), acts of God, and any other threat to the business of the corporation (e.g., climate change). In addition, the existence of material business risk can trigger additional legal duties and thus liabilities.
How are corporations subject to risk and what duties are triggered in response to risk?
Generally speaking, corporations are legal persons, formed pursuant to a state’s law of corporations. In conducting their activities, corporations are subject to legal enforcement and liability similar to natural persons. However, the benefit of doing business in the corporate form is that it generally allows natural persons who may choose to invest in a corporation to limit their personal liability for that corporation’s financial and other liabilities, unless, of course, that person’s individual actions trigger personal liability. For example, if a corporation’s air or water discharge exceeds its discharge permit limits, the corporation is liable, but there would be no personal liability for individual investors, although the investor could lose value in the shares of its stock as a result of environmental enforcement against the corporation.
General corporate risk-management principles focus on protecting the corporation and its investors by protecting the business of the corporation (i.e., its performance and assets) and ensuring compliance with the law of corporations and compliance generally, including the disclosure of all material information to investors so that investors can make informed decisions about their investment. Within this subset of laws, corporations are first subject to the law of incorporation — the laws specifically governing their formation and operation that address the powers of the corporation, elections of directors, duties of the directors and officers, provisions regarding the sale of stock and stockholder protections, meetings, insolvency and dissolution, and more.
An important facet of corporate law is a corporate director’s fiduciary duty to the corporation and stock-holders, which includes duty of care and duty of loyalty. In general terms, this means that a director acts in the best interest of the corporation and stockholders rather than serving their own interests. The duty of care requires a director to make informed business decisions, generally considering all material information reasonably available to them. The duty of loyalty requires the director to act in good faith to advance the best interests of the corporation and refrain from conduct that injures the corporation.
Beyond the applicable state law of incorporation, additional disclosure rules apply to publicly traded corporations (and certain privately held as well). Investors in publicly traded (and some privately held) companies are protected by requirements imposed by the U.S. Securities and Exchange Commission (SEC), which implements statutes adopted to ensure the public trust in publicly traded corporations, such as the Securities Act of 1933 (1), the Securities Exchange Act of 1934 (2), and the Sarbanes-Oxley Act of 2002 (3). Corporations must comply with applicable disclosure requirements to ensure that investors are armed with sufficient information to understand material risks to the corporation, including its viability and performance.
Thus, to survive, a corporation, whether private or publicly traded, must manage the risk of noncompliance with the law of corporations, including fiduciary duty and disclosure requirements, in addition to the laws triggered by corporate activities, such as health, safety, and environmental laws.
The landscape for managing environmental risk
Corporations are subject to legal liability for breaking environmental laws, including strict liability (that is, regardless of the presence or absence of fault) for civil penalties assessed by federal or state government for noncompliance. Strict liability imposes responsibility even in the absence of proof of negligence or intent.
Corporations are also liable under state...
Would you like to reuse content from CEP Magazine? It’s easy to request permission to reuse content. Simply click here to connect instantly to licensing services, where you can choose from a list of options regarding how you would like to reuse the desired content and complete the transaction.