Headline-grabbing payouts from the companies whose mining affiliate was responsible for Brazil’s largest environmental disaster a few years ago is the type of outcome general counsel can help their companies avoid, a corporate support executive says. 

Samarco and its corporate owners are on the hook for some $19 billion to cover costs from the release of tons of iron ore sludge that buried a village as a result of the collapse of a tailings dam the company operates. 

Preventing this kind of disaster is one of the reasons shareholders have increasingly asked executives to pay attention to environmental, social and governance (ESG) values, a trend general counsel can help their companies get in front of, Christi Cannon of global class action services company Broadridge says. 

General counsel are well positioned to help align their company’s internal processes to shareholder concerns over how seriously management is taking not just environmental threats to their business but other ESG issues, including pay parity and leadership diversity. 

“The general counsel has the opportunity to appreciate the ultimate potential impact of providing that dialogue and to advise company leadership on the benefits of it,” said Cannon, a vice president at Broadridge. 

Increased activism

Especially outside the United States, shareholder lawsuits over ESG issues remain rare, but that’s changing as companies deal with increasingly activist investors. 

From the general counsel’s perspective, there are a number of ways to defuse issues well before they lead to disaster and get to the lawsuit stage by keeping lines of communication between investors and management open and demonstrating that ESG policies are more than window dressing. 

“Investors are looking for transparency,” Cannon told Legal Dive. “The general counsel can be valuable in creating that sort of transparency and communication with an ultimate understanding of the fact it’s in the best interest of the company to minimize the risk of litigation.”

Even when they have on their board activist investors demanding action, companies can take the time they need to get their ESG policies right as long as transparency is there, Cannon said.

“Investors recognize that achievements on ESG issues are a process,” she said. “If they get active communication and transparency, they will sometimes wait for that alignment.”

A settlement reached earlier this year between shareholders and Pinterest, the social media company, is a good example of what can happen when ESG values are dismissed. 

The company was alleged to have had a culture of sexual harassment and discrimination that took a shareholder lawsuit to curb. The company settled complaints by former employees by agreeing to create a $50 million fund to compensate for harms and put in place processes to head off future workplace problems. 

The settlement is especially important from a legal standpoint because it makes an explicit link between the company’s culture and the fiduciary responsibilities of its executives. The company’s culture, according to the settlement, prevented Pinterest from making money it otherwise would have made, to the detriment of shareholders.

“The Pinterest board’s deference to a culture of sexism and systemic discrimination has impaired Pinterest’s value and the value of the system’s investment in Pinterest,” Seth Magaziner, the Rhode Island state treasurer and head of the state’s pension fund, said at the time the suit was filed.   

Molly Bowen, an attorney with the lead plaintiff’s counsel Cohen Milstein, called the agreement groundbreaking because of the way it tied together culture and fiduciary duties.

“The settlement is the first of its kind to embrace diversity goals around a company’s product,” she said. 

Shareholder toolkits

Increasingly, shareholders have a number of tools at their disposal short of litigation to prod company management into taking ESG action. Voting down management’s pick for a board seat, for example, or putting forward their own candidate or their own slate of candidates to further goals, or submitting a policy resolution for a vote. 

“Perhaps [shareholders] publicly say they are not going to vote in favor of this slate of directors that the board is proposing or a particular director for a particular reason,” Cannon said. “They’re going to propose their own.”

General counsel can encourage these and other steps to head off problems by helping to keep management and investors aligned, Cannon said, because the alternative, litigation, is a negative for all parties. 

“Litigation is certainly, at the end of the day, what no one wants to start off thinking about,” she said. “What GCs really need to be thinking about is how they can best leverage pre-litigation activism by shareholders, and that would include things like active dialogue on these issues.”

From a business standpoint, alignment on ESG values should be seen as more than just a way to avoid shareholder conflict. A number of studies show stock performance is better among companies with diverse management than those without it, in part because diverse leadership keeps companies better in tune with changing market preferences.

“The statistics really are bearing out that having that kind of culture and focusing on these things in a way that is aligned with investors’ values does have an impact on corporate performance,” Cannon said. 

In one study, The Wall Street Journal found that the S&P 500 companies with the most diverse leadership had an average annual stock return of 10% over five years compared to 4.2% for the least diverse companies.

At least for public companies, having a policy on ESG and measuring performance against it could soon be a mandate; the Securities and Exchange Commission is expected to move forward with disclosure requirements, which will have the effect of making shareholder-management alignment a compliance issue to some degree. 

“The GC has a real opportunity to set the tone on the importance of alignment and with investors,” Cannon said. “The GC has the ability to look at the developments within the marketplace short of litigation and establish a tone from the top on communication and transparency on these issues.”