Today in corporate America there is a growing question that relates to board management. Are there certain issues such as the ESG (environmental, social, and governance) movement that corporations, including banks and bank holding companies, must address? This is the first of a two-part survey of some key issues regarding that question, especially as they relate to commercial banks.

With respect to ESG topics, some public interest groups, along with certain private equity firms, have pressured public and private corporations alike to make disclosures about how the corporations have undertaken changes in their own business operations to promote, among other things, improvement in the environment. Larry Fink, chairman and CEO of BlackRock, the largest investment firm in the world with $8.5 trillion in assets under management, has been a major proponent of ESG.

The Securities and Exchange Commission (SEC) has also proposed rules that fit within the ESG framework. In March 2022 it presented regulations that would mandate climate-related disclosures in registration statements and periodic reports, including “climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition.” The SEC states that climate change can pose significant financial risks to companies, depending on the nature of the business, and investors need reliable information about such risks to make informed investment decisions. More than 450 companies in the S&P 500 are making voluntary disclosures regarding ESG matters. Although most of the focus on ESG issues is on public companies, ESG is also a topic that nonpublic companies must consider. This includes, of course, commercial banks.

State laws generally, and Delaware’s in particular, have made it clear primarily through state supreme court holdings that in ordinary business decisions, directors may consider corporate interests (such as ESG) along with the interests of stockholders and their wealth as long as there is a relationship between those other corporate interests and a benefit to stockholders. Some commentators argue that ESG advocacy maximizes stockholders’ value, but how that is accomplished is not especially clear. In fact, with a company that operates in line with ESG advocacy, stockholders may at times be at a disadvantage and may be worse off than other constituencies. Commentators have also pointed out that under ESG, wealth may be transferred from stockholders to other constituencies, but no argument proclaims that wealth may be transferred from other constituencies to stockholders. One noted commentator has stated that these ESG issues can make directors “moral philosophers” in their decision-making.

The real difficulty lies in how corporations can pursue ESG issues even if doing so disadvantages stockholder interests. Most states have passed legislation to address this question through “public benefit corporations,” a concept that allows but does not require a corporation to fit within that category. Delaware is historically the leading state on corporation law and director fiduciary duties. Under the Delaware code, a “public benefit corporation” is a for-profit corporation organized to produce a public benefit or public benefits. The public benefit corporation “shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s’’ conduct, and the public benefit(s) identified in its certificate of incorporation. “Public benefit” means, among other things, a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities, or interests (other than stockholders) including, but not limited to, artistic, charitable, cultural, educational, environmental, religious, and other areas specified. The board must manage the business in a manner that “balances” the pecuniary interest of stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit(s) identified in the corporation’s certificate of incorporation. An existing corporation may amend its certificate of incorporation to become a public benefit corporation with the approval of stockholders representing at least two-thirds of the outstanding stock of the corporation.

The Alabama Business Corporation Law has similar provisions, which became effective for all Alabama corporations on Jan. 1, 2021. The Alabama law states that a “benefit corporation” is a corporation that includes in its certificate of incorporation a statement that the corporation is subject to the particular provisions set forth in the statute. As with Delaware, an existing corporation may become a public benefit corporation with at least a two-thirds vote of its stockholders. The Alabama provision states that the board of directors must act in a responsible and “sustainable manner” and in a way that pursues the public benefit(s) identified in the company’s certificate of incorporation. The statute seems to call for a balancing of interests by the directors. A “responsible and sustainable manner” means a manner that (i) pursues through the corporation’s business the creation of a positive effect on society and the environment as a whole and that is material considering the corporation’s size and the nature of its business, and (ii) considers in addition to the interest of stockholders generally the separate interests of stakeholders known to be affected by the conduct of the corporation.

Over 3,000 corporations in the United States, representing only 0.01% of all business corporations, have become public benefit corporations under various state statutes. Whether more companies are formed as or become public benefit corporations seemingly is as much a political or social issue as anything else, with the decision ultimately resting with the stockholders. The ESG climate, however, will continue to affect business corporations, even those that do not become “public benefit corporations,” because their board of directors must consider how the company conducts its business and the potential risks (including those related to ESG issues) it undertakes. That is particularly true for banks as part of their lending policy.

Next month we’ll take a closer look at these matters as they relate to commercial banks.