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Corporate Activism: Doing the Right Thing Without Breaching Fiduciary Duties

The recent and tragic deaths of Black men and women at the hands of police brutality have spurred cries for corporations to support social justice causes. Many have answered that call. Nike released an ad that begged, "[f]or once, don't do it... Don't pretend there's not a problem in America." Nike’s message was so compelling that even Adidas, Nike’s primary competitor, shared links to the ad on Twitter.

Bank of America and PNC Bank each have committed US$1 billion to address economic and racial inequality. Target Corp. has pledged US$10 million to civil rights organizations, such as the National Urban League, and 10,000 hours of consulting services to small businesses owned by people of color.  

Not to be outdone, Comcast Corp. announced that it will allocate US$75 million to organizations including the National Urban League, the Equal Justice Initiative, and the NAACP, and US$25 million in media over the next three years. These and other corporations also have issued public statements in support of equality, diversity, equity, and inclusion.  

Although such efforts are well intended, they can have negative consequences when not executed properly. For example, in 2019, Gillette, a shaving and personal care brand, ran an ad warning against toxic masculinity and encouraging men to abandon chauvinistic behavior. Gillette’s stance caused some customers to destroy Gillette products and vow never to do business with the company again. These consumer boycotts and negative press reportedly resulted in a US$8 billion write down caused by Gillette’s failure to understand its customers and the availability of cheap alternatives to its products.  

Since taking a social justice stance could lead to a loss in corporate value, directors and officers risk being accused of breaching their fiduciary duties if they participate in activism. As a result, corporate directors and officers must balance their interest in “doing good” with their primary obligation to “do well” for their companies (i.e., enhancing and protecting value for shareholders). Fortunately, this balancing act is manageable.  

Corporate officers and directors who wish to “do good” and stay faithful to their fiduciary duties must take three discrete steps: 

  1. Take due care in evaluating any anticipated action, obtaining expert risk/utility analyses to determine whether the resulting corporate benefit is likely to be greater than any harm. 
  2. Comply with the duty of loyalty by verifying that any transactions that benefit individual officers and directors are fair to the corporation and its stockholders. 
  3. Avoid waste by ensuring that the resources they commit to a social justice cause are reasonable given their company’s size, value, and the benefits of philanthropy. 

Due care is necessary when engaging in corporate activism 

The principals and laws that shape a company’s corporate governance are specific to the corporation’s state of incorporation. Since more than a million business entities have made Delaware their legal home, including over 50 percent of all publicly traded US companies and 64 percent of the Fortune 500, this article will focus on the laws from Delaware.

In managing and controlling a company’s business and affairs, directors and officers of a Delaware corporation owe — to their corporation and its stockholders ⁠— concomitant fiduciary obligations to act with due care and loyalty. These duties are rooted in the responsibility to enhance and protect a company’s value for its stockholders. 

At its core, the duty of due care mandates that directors act on an informed basis and consider all material information that is reasonably available. The duty requires directors and officers to have reasonable knowledge of their company’s business, obtain credible information with respect to corporate actions, and anticipate and understand the consequences of each decision or transaction.  

Given its consumption of significant resources and potential for consumer backlash, corporate activism could be inconsistent with directors’ and officers’ primary charge — obtaining and preserving value for the company. But directors and officers do not breach their fiduciary duties simply by pursuing a corporate action intended to address inequality. Rather, corporate leadership is presumed to have acted “on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company,” otherwise known as the business judgment rule.  

A breach of the duty of care occurs only if directors and officers act with gross negligence — meaning that their conduct “constitutes reckless indifference or actions that are without the bounds of reason.” As long as decisions appear to be reasonable when they are made, directors and officers will not be penalized for simple errors in judgment.  

Thus, relying on the broad principles established by the duties of care, and through application of the business judgment rule, social justice activism likely will not result in a breach of due care unless directors and officers fail to adequately consider and understand consequences of their activism (or lack thereof). 

In Smith v. Van Gorkom, for instance, the Delaware Supreme Court found that the defendant directors breached their duty of care by approving a transaction during a two-hour board meeting after relying on the board chairman’s 20-minute presentation. Among the board’s failings were that it did nothing to understand the value of the company it decided to sell, did not conduct a market analysis, and refused to scrutinize the contracts governing the transaction.  

Similarly, in Cede v. Technicolor, the board was found to have breached the duty of care by failing to conduct a pre- or post-transaction market test without having a rational business basis for not doing so. Given the holdings in Van Gorkom and Cede, directors and officers who pursue a transaction or corporate action without the requisite deliberation or analysis risk being liable for breach of the duty of care. Delaware law provides no exception for corporate action that also furthers a social justice cause. 

Inaction also could result in allegations of breach of the duty of care. Consider Nike’s decision to celebrate the 30th anniversary of its slogan, “Just Do It,” by airing a commercial narrated by Colin Kaepernick, the former quarterback for the San Francisco 49ers. According to Fast Company, Nike’s support of Kaepernick’s activism resulted in “US$163 million in earned media, a US$6 billion brand value increase, and a 31% boost in sales.”  

In light of how significantly Nike and its stockholders benefited from corporate activism, not doing so could have been viewed as a failure to act on an informed basis because decision-makers were out of touch with Nike’s consumers. Similarly, on July 2, 2020, a Facebook stockholder filed suit claiming that the social media giant’s inaction after certain racially charged statements by US President Donald Trump caused advertisers to boycott, thereby causing significant financial harm to the company.  

Thus, as required by the duty of care, directors and officers should strive have reasonable knowledge of the company’s business, including the causes that require either corporate activism or inaction. 

Corporate activism requires loyalty to the corporation before personal beliefs

Corporate activism also must satisfy the duty of loyalty. Corporate officers and directors are responsible for protecting the interests of the corporation and refraining from doing anything that injures the corporation and its stockholders. That responsibility gives rise to the duty of loyalty, which mandates that the best interest of a corporation and its stockholders takes precedence over any interest possessed by a director or officer and not generally shared by the stockholders.  

The duty of loyalty requires that directors and officers avoid participating in social justice-motivated transactions or corporate conduct that benefits certain directors or officers to the detriment of the company and its stockholders. It also prohibits directors and officers from benefiting themselves (or their fellow directors and officers) by forcing their corporation to engage in unfair transactions.  

Consider a situation where a CEO/board chairman commits his company to donate US$100 million a year for five years to a nonprofit organization focused on reducing greenhouse gas emissions. Consider also that this environmental organization was founded by the president of the United States, and that the CEO decided to support that organization in order to be appointed United States Ambassador to the United Kingdom by the president. If the US$100 million commitment is determined to be excessive or does not yield positive outcomes for the company, the CEO’s decision likely would constitute a breach of the duty of loyalty.  

Boyer v. Wilmington Materials, Inc. is a real-life illustration of this principle. In that case, the Delaware Court of Chancery held that a company’s five-person board breached its duty of loyalty by agreeing to sell all of the corporation’s assets at an unfair price reached through an unscrupulous process to a company owned by three of the board members, and in which the other two directors would own shares after the transaction.  

Similarly, in a post-trial decision in Valeant Pharm. Int'l v. Jerney, the court held that a director/officer breached the duty of loyalty by approving an initial public offering and a failed corporate restructuring that would result in large cash bonuses for him. Not only did the officer/director defendant fail to prove that his US$3 million bonus was fair to the corporation, but he also could not demonstrate that the process through which it was awarded was entirely fair to the company.  

Given these and other Delaware court decisions, directors and officers considering corporate activism should obtain a complete understanding of the conduct or transaction contemplated, including whether any directors or officers stand to gain personally. If any director or officer will benefit personally from the activism, then the company’s decision makers must confirm that action or transaction contemplated is fair to the corporation and its stockholders.  

Although evaluating fairness involves a fact-intensive analysis, activism that personally benefits directors and officers likely will not be considered fair unless it confers some significant, tangible benefit upon the corporation other than the public’s general approval of the corporate conduct.  

Corporate activism is possible without waste  

While corporations exist to maximize shareholder wealth, corporate managers have always had some legal discretion (implicit or explicit) to sacrifice profits for the public interest. Indeed, Delaware law specifically provides that corporations “may make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof.” When engaging in such conduct, however, directors and officers must be careful to avoid claims of corporate waste.  

To recover on a claim for corporate waste, a plaintiff must prove that the corporation engaged in an exchange or transaction that was “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” Stated differently, a claim for waste exists “where directors irrationally squander or give away corporate assets.” Given this standard, corporate waste could exist where a corporation commits significant resources to philanthropic endeavors — as opposed to efforts meant to generate profits — without receiving much, if any, benefit.  

For example, in Theodora Holding Corporation v. Henderson, the Delaware Court of Chancery held that because the corporation’s charitable donation was less than the federal tax deduction limit of five percent of the company’s income, the donation was reasonable and did not constitute waste.  

Similarly, in Kahn v. Sullivan, the Delaware Supreme Court refused to find that a board’s decision to fund the construction and establishment of an art museum lacked a corporate purpose and constituted waste because the amount committed was reasonable considering the corporation’s value, annual revenue and profits, and tax benefits, and the corporation received economic benefits from being able to use the museum to promote its business.  

The holdings of Henderson and Kahn demonstrate that corporations that seek to engage in activism through philanthropy should assess the reasonableness of their gift by weighing its size against the company’s assets, revenue, and value. Significant donations are more likely to be found reasonable if they provide economic benefit and/or tax relief.  

Online retail giant Amazon likely engaged this risk/utility analysis when, in June 2020, it purchased the naming rights to the arena in downtown Seattle that will be home to an NHL and WNBA team. Rather than emblazon its name and trademarks all over the arena, Amazon has elected to christen it the Climate Pledge Arena — in reference to Amazon’s commitment to combating climate change and its pledge to focus on sustainability and carbon neutrality. 

Takeaways  

US businesses are on notice that domestic consumers prioritize companies that are vocal about the issues that consumers consider important. As a result, many companies have elected to engage in political or social activism through corporate conduct. These actions may have a positive impact on society, but they also might lead to consumer backlash or challenges by stockholders. To minimize exposure, directors and officers seeking to engage in corporate activism should do the following: 

  • Evaluate the potential corporate action to determine whether and how much the activism might benefit or harm the company; 
  • Evaluate the corporation’s potential silence to determine whether, on balance, inaction provides the greatest benefit and the least harm to the corporation; 
  • Ensure that the corporate decision or conduct is based on presentations by the corporation's officers, employees, or board committees, or by professionals or experts selected with “reasonable care” to analyze the anticipated conduct (DGCL §141(e)); 
  • Confirm that the directors or officers will not benefit from corporate conduct that is unfair to the corporation; and 
  • Engage in corporate philanthropy that is reasonable based on the company’s value and profits, and that provides a marketing tax benefit to the company.

For more resources on social justice, equity, and inclusion, visit the ACC I.D.E.A.L. Foundation page.

About the Authors

Robert LavetRobert Lavet is responsible for managing all legal affairs, compliance, and government relations for SoFi and its affiliate entities. Prior to joining SoFi, he served as a principal in the Education and Litigation practice groups of the Washington, DC law firm of Powers Pyles Sutter & Verville (PPSV), and was senior vice president and general counsel of Sallie Mae, a Fortune 300 company. He served as a member of the Board of Directors of the Association of Corporate Counsel from 2002 through 2007, and was president of the Washington Metropolitan Area Corporate Counsel Association (WMACCA) in 2001.

Oderah NwaezeOderah C. Nwaeze is a trial lawyer and Partner at Duane Morris LLP, whose practice focuses on direct and derivative actions under Delaware General Corporation Law, banking litigation, and business litigation under Delaware law (as well as in various federal courts).



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