ESG In Action: Diversifying Corporate Governance

March 30, 2021Articles
American Bar Association - Business Law

Dinsmore's Richik Sarkar was published in the American Bar Association's Business Law Today this week discussing a few lawsuits alleging that lack of board and management diversity constitutes a breach of fiduciary duty. An excerpt from the article, "ESG In Action: Diversifying Corporate Governance," is below.

"While the purpose of these suits is laudable, significant threshold legal questions exist.  First, the suits typically allege “demand futility” to explain why underlying diversity concerns were not taken to the board as opposed to directly filing suit.  Considering the focus on diversity issues in the new ESG environment, and the lack of any detail regarding board processes and deliberation, whether such requests were futile is a crucial issue to be resolved by the courts.  Next, statements regarding legal or ESG compliance are not typically actionable.  Finally, causation and damages will be high hurdles, since a direct relationship between board diversity/ESG failures and actual shareholder harm must be established.  Plaintiffs currently allege that greater board diversity leads to greater profits, relying upon, among other things, a 2018 McKinsey & Company report noting that companies with more diverse boards were more likely to have higher profits.  However, correlation is not legal causation, and it will be difficult to convince courts that studies like this justify ignoring the protection of the Business Judgment Rule.

Recognizing many of these defenses, the U.S. District Court for the Northern District of California dismissed a board diversity lawsuit against Facebook in a March 19, 2021 order. The Court found that plaintiffs in Ocegueda v. Zuckerberg, N.D. Cal., No. 3:20-cv-04444, did not plausibly plead demand futility or “a materially false statement” under Section 14(a).

Click here to read the full article.