Market News

 February 12, 2009
Duties of Directors in 'Going Green'

 By Maurizio Romano and Jatinder Chera (student-at-law)

GLOBE-Net- Analysts suggest that not since the 1930s has the world seen an economic downturn as widespread as the one we are currently experiencing. At the same time, perhaps never before has a concern over the environment been so firmly established at the forefront of the public’s psyche. In fact, governments are seizing the current economic situation as an opportunity to rebuild our infrastructure and develop green industries.

In many instances, this ’green shift’ has various stakeholders demanding that corporations make environmentally friendly corporate decisions - which places the burden on directors to evaluate these demands. However, directors owe a fiduciary duty to the corporation - to act honestly, in good faith, and with a view to the best interests of the corporation. Accordingly, any decision made by directors, whether benefitting the environment or not, must be weighed vis-à-vis the corporation’s best interests.

A Corporation’s Best Interests

Where ’going green’ is financially profitable, it would be easy for a director to claim to be addressing the best interests of the company. There are many examples of this: replacing lights with lower wattage bulbs, replacing old vehicles with low emission vehicles, or installing solar panels on rooftops. However, what if the motivation behind a corporate decision was to benefit the environment, with little or no tangible benefit to the corporation? Are directors still discharging their fiduciary duty? Especially in the current global economic situation, it is likely that director decisions will be subject to increased scrutiny by stakeholders (most notably shareholders and creditors) over whether the consideration of factors - other than profitability - is justifiable by directors in discharging their fiduciary duty.

Traditionally, the goal of a corporation has been found to consist of maximizing profits. However, other factors may be considered. In Peoples v. Wise, the Supreme Court of Canada (SCC) interpreted the content of the fiduciary duty and the phrase "best interests of the corporation" as follows:

From an economic perspective, the "best interests of the corporation" means the maximization of the value of the corporation. However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly managing with a view to the best interests of the corporation ... in determining whether... [directors] are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. [Emphasis added]

To what extent may other factors - particularly the environment - be considered by directors discharging their fiduciary duty?

Corporate Social Responsibility

There appears to be no reported cases in Canada or the United States considering this question. However, a useful analogy may be found in cases dealing with corporate social responsibility. In Dodge v. Ford Motor Co. (Ford), shareholders of Ford Motor Co. brought an action to force the board of directors to declare special dividends, rather than re-investing the surplus back into the business for the stated intention of increasing employment and selling more cars at a lower price.

In reaching its decision, the court in Ford reasoned that:

A business corporation is organized and carried on primarily for the profit of its stockholders. The powers of the directors are to be employed to that end....It is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others. [emphasis added]

Similarly, the English court of Chancery stated in Parke v. Daily News Ltd.:

The Law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.

If we consider the environment to be today’s "corporate responsibility," then a court could find that a decision which benefits the environment but does not benefit the corporation - or if it does so only in the long-term - may not be in the ’best interests of the corporation’. and thus is not adequate to discharge a director’s fiduciary duty.

Oppression Claims

A real risk to directors is a potential oppression claim. In BCE Inc. v. 1976 Debentureholders, the SCC described the following two-pronged approach to assess an oppression claim:

1. Does the evidence support the reasonable expectation asserted by the claimant?

2. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms "oppression", "unfair prejudice" or "unfair disregard" or a relevant interest?

The SCC established "reasonable expectations" as the ’cornerstone’ of an oppression claim, and whether the expectation is reasonable is to be considered "having regard to the facts of the specific case, the relationship at issue, and the entire context."

Today a stakeholder could legitimately argue that their reasonable expectation is the maximization of corporate profitability. For example, a creditor may argue that decisions which favour the environment over short-term profitability may be harsh or burdensome on the creditor and/or lack a valid corporate purpose because such payments may make it more difficult for the corporation to satisfy payments and other debt obligations as they come due. Shareholders may argue that such decisions unfairly prejudice or disregard shareholders’ interests, particularly at a time when shareholders have lost substantial wealth.

Managing Reasonable Expectations

What does all this mean for directors? In situations where a corporation has publicly stated that it will focus on the environment, or is a ’green investor’, it would be difficult for a stakeholder to argue that it was their reasonable expectation for the corporation to focus on profit only. In contrast, where companies are not ’intrinsically’ green, and have not made any representation to suggest otherwise, it is not clear whether environmental considerations may also form the ’reasonable expectations’ of the stakeholders.

Accordingly, directors would be wise to manage such reasonable expectations, particularly where environmental responsibility and corporate profitability are not necessarily conjoined. Failing to do so may result in directors encountering a ’red light’ when trying to ’go green’.

This article was originally published in Blakes Bulletin on Business, February 2009, and is re-printed here with the kind permission of the author. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Original Copyright 2009, Blake, Cassels & Graydon LLP

Source: Mondaq