6. The board of directors

A significant portion of the academic and public debate on corporations during the last 50 years has been largely based on two assumptions: (i) equity investors have the sole goal of maximising their financial returns relative to a risk they are willing to accept; (ii) companies’ other stakeholders and society at large should have their well-being properly considered in contracts and statutes (e.g. employment contracts and environmental laws). If these assumptions hold in reality, the maximisation of long-term shareholder value would be the optimal purpose for corporations, namely because of the following:

  1. a. directors and key executives would be clearly accountable to the sole goal of maximising shareholders’ wealth within what is legally permissible

  2. b. society’s welfare would be maximised when a company increases its profits, assuming that market failures – including asymmetries of information – should have been corrected by the state.

The most famous formulation of the logic summarised in the paragraph above was Milton Friedman’s argument that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” (Friedman, 1970[1]).

Nevertheless, at least since the G20/OECD Principles were first adopted in 1999, consideration of stakeholders’ interests has been featured as a relevant consideration, notably in relation to the recommendations contained in Chapter 4 on the role of stakeholders in corporate governance. Moreover, the shift of general discourse in favour of broader consideration of non-financial goals has been accelerating in recent years. In 2019, the Business Roundtable released a statement where 181 CEOs of large US corporations declared they “shared a fundamental commitment to all [their] stakeholders”, including to the delivery of value to their customers, to investing in their employees, to dealing fairly with their suppliers, to supporting communities in which they work and to generating long-term value to shareholders (Business Roundtable, 2019[2]). In his 2020 annual letter, the CEO of BlackRock – which is the biggest asset management firm worldwide with over USD 9 trillion of assets under management – wrote to CEOs of its investee companies on corporate risks related to climate change and concluded that “companies must be deliberate and committed to embracing purpose and serving all stakeholders – your shareholders, customers, employees and the communities where you operate” (Fink, 2020[3])

Evidently, a company’s commitment to all its stakeholders is not irreconcilable with its long-term profitability. After all, loyal customers, productive employees and supportive communities are essential for a company’s long-term capacity to create wealth for its shareholders. In any case, it should be noted that corporate law does not typically adhere fully to the “shareholder primacy” view, allowing companies to alternatively serve some stakeholders’ interests potentially at the expense of short or long-term profitability.

In Australia, section 181 of the Corporations Act provides that directors must exercise their powers “in good faith in the best interest of the corporation” without equating the best interests of the company with those of its shareholders. In Sweden, while Chapter 3 of the Companies Act provides that a company’s “purpose is to generate a profit to be distributed among its shareholders”, the Act also allows companies to establish other purposes in their articles of association” (Skog, 2015, p. 565[4]). In France, legislation amended in 2019 goes further, establishing that “the corporation must be managed in the interest of the corporation itself, while considering the social and environmental stakes of its activity” (art. 1 833, Civil Code). In the United Kingdom, section 172 of the Companies Act provides that “a director of a company must […] promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to […] the long term, the interests of the company’s employees, […] suppliers, customers, […], the impact of the company’s operations on the community and the environment […]”. In Brazil, art. 154 of the Company Law broadly establishes directors’ duties are towards the company, and adds that directors should also satisfy “the requirements of the public good and the social function of the Company” (see more about Brazil’s legislation in Chapter 6).

In the US state of Delaware, jurisprudence ranges from an identified director’s duty to maximise shareholder profits (especially in some takeover cases, such as Revlon v. MacAndrews & Forbes Holdings, Inc.) to rulings that suggest that insufficient attention to stakeholders interests may be legally actionable (e.g. Marchand v. Barnhill). Likewise, in the Hobby Lobby case, the US Supreme Court explained that “while it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so” (Fisch and Davidoff Solomon, 2021[5]).

In any case, from a pragmatic perspective, even if an executive had a strictly defined “shareholder primacy” mandate, the business judgement rule principle1 adopted in many legal systems and statutes authorising companies to donate money would afford the corporate executive significant discretion to consider different stakeholders’ interests (Fisch and Davidoff Solomon, 2021[5]). Except for cases of conflicts of interest, it has been unlikely in practice that an executive would be held liable in court if he or she prioritised within reasonable limits a stakeholder interest at the expense of a company’s current profits. The judge would typically defer to the executive’s assessment of what would be likely best for the long-term profitability of the corporation.

A central discussion related to corporate sustainability is whether better ESG practices could be proven to enhance financial performance and resilience, for instance due to improved risk management and better strategy.

A large volume of research suggests that the better the level of companies’ ESG practices, the higher their financial performance, albeit with some divergence in findings. A 2021 paper published by NYU Stern Center for Sustainable Business and Rockefeller Asset Management reviewed the findings of 245 research papers issued between 2015 and 2020 (Wheelan et al.[6]). This review concludes that 58% of the papers found a positive correlation between ESG practices (such as suggested by high ESG ratings) and operational and financial metrics (such as return on equity, return on assets and stock prices). In 21%, there were mixed results (the same study found positive, neutral or negative results), 13% did not find a clear relationship and only 8% showed a negative relationship.2

The aforementioned meta-analysis found a weaker relation between investors’ focus on ESG risks and the performance of their portfolios. In reviewed studies looking from an investor’s perspective, 33% showed better performance for securities portfolios with a purported focus on ESG risks taking into account their risk-adjusted returns (such as a Sharpe ratio), in 28% the results were mixed, in 26% a clear relationship was not identified and 14% found negative results.

It is important to note that many of the reviewed studies faced methodological challenges such as the low standardisation of ESG data and lack of emphasis of some investment vehicles on financially material issues, which may limit the conclusiveness of their results (Wheelan et al., 2021[6]). Moreover, some other empirical evidence suggests that better financial and investment performance is also correlated with specifically the governance aspect (“the G”) in ESG, company fundamentals, and the size and geographical location of the company (S&P Global, 2019[7]; Belsom and Lake, 2021[8]; Ratsimiveh et al., 2020[9]; Boffo and Patalano, 2020[10]).

Despite some divergence in research findings about the business case for better ESG practices, companies’ attention to and disclosure on sustainability issues have become increasingly visible. This can be seen not only in the high number of companies that report on sustainability (as mentioned in chapter 5), but also in the adoption of ESG metrics in executive compensation plans. While most of the components of the executive remuneration plans are still linked to financial measures, companies have begun to integrate ESG-related metrics in their plans. Globally, out of a total number of 9 000 largest companies with almost USD 104.5 trillion market capitalisation3 as of the end of 2021, executive compensation plans are linked to performance measures in 90% of those companies (i.e. part of executives’ remuneration is variable). Thirty percent of those companies with performance-linked executive remuneration use ESG-linked performance measures in their plans.

In the case of Brazilian listed companies surveyed by the OECD, a significant majority of large companies have their executive remuneration linked to ESG performance metrics and targets (see figure below). There is, however, a relevant difference in the case of smaller companies (those not included in the IBOVESPA index).

A heated public debate has taken place during the last decade on whether public companies’ senior executives and shareholders are excessively focused on short-term results in detriment to the investment in long-term projects (so-called “short-termism”). Some have argued that short-termism is not a problem with economy-damaging consequences, which could be shown by the recent success of innovative companies in public equity markets (Bebchuk, 2021[11]) and steadily rising investments in R&D (Roe, 2018[12]). Others, however, disagree with this assessment, and suggest, for instance, that there is a misalignment between executive pay and long-term results that has led to corporations investing less in projects with long-term payoffs such as building new factories (Strine Jr., 2017[13]). Evidence shows that investment as a share of GDP by non-financial companies has been sluggish, growing only slightly since 2005, while R&D has significantly increased during the same period (OECD, 2021, p. 32[14]).

While contributing to the policy debate on short-termism is beyond the scope of this report, it is important to reason how sustainability and short-termism4 (if indeed an economy-wide concern) may be related.

To begin with from a more pessimistic perspective, better disclosure on climate-related risks and broad legal provisions for management to consider the environment may not achieve much if the incentives for directors, senior executives and investors are to act only on what is relevant for short-term financial results. In the same way financial reports’ information on R&D expenditure and capital investment may not be enough to incentivise a long-term view of senior executives and shareholders, it could be argued that data on GHG corporate emissions would not be sufficient to improve corporations’ climate-related policies. According to this line of argument, corporations might eventually move towards a lower carbon footprint but most likely only if and when public policy or stakeholders’ preferences have a meaningful short-term impact on a company’s balance sheet.

In some circumstances, better disclosure of sustainability risks and changes in company law (or at least how the legislation is interpreted) might indeed be effective regardless of executives’ and shareholders’ time horizons. For instance, transparency could lead environmentally conscious employees or consumers to steer away from an above-average-polluting company, potentially reducing, respectively, its productivity and revenues and, therefore, giving a competitive edge to greener companies. Likewise, better information on corporate climate-related risks might make policy makers act sooner rather than later after realising the concrete physical risks companies face. Lastly, some individual court rulings involving major carbon-emitters may actually have a meaningful impact (e.g. the District Court of the Hague’s decision mentioned in Chapter 7).

In addition, such disclosure may impact the investment and voting decisions of investors, who seem to be concerned with sustainability issues when managing their portfolios (see Table 3.1 and Figure 3.4 for global investors’ interests and Figure 3.3 for asset managers investing in Brazil). This might be the case either because many shareholders actually have a long-term view, or due to the fact that climate change and other sustainability matters have become a short-term concern for corporations’ financial results (or a combination of both factors). What remains to be seen – within the short-termism debate – is whether and how quickly investors’ concerns about climate change will translate into changes in directors’ and officers’ decision-making processes. While it is still an open question, there is evidence that shareholders are making themselves heard rather quickly, including through changes in executive compensation plans. As seen in Table ‎6.1 and Figure ‎6.2, over a quarter of the largest listed companies globally and about half of Brazilian public companies already use ESG measures in their plans, and shareholders in some jurisdictions have presented proposals for companies to adopt GHG emissions targets (see Chapter 7).

While business reality is complex, corporate law and capital markets regulation generally present a simplified definition of directors’ and officers’ duties in order to make them functional. Corporate laws often provide – in a language similar to the one adopted by G20/OECD Principle VI.A – that “board members should act on a fully informed basis, in good faith, with due diligence and care” (“duty of care”) and “in the best interest of the company and the shareholders” (“duty of loyalty”). As a whole, these duties of care and loyalty are often referred to as directors’ and executives’ “fiduciary duties”.

As detailed above in this chapter, company laws in different jurisdictions vary in relation to who is effectively the recipient of directors’ and executives’ fiduciary duty of loyalty. For ease of discussion, one could outline four models (OECD, 2022, pp. 38-39[15]):5

  1. a. At one end of the spectrum, company law and judiciary precedents may fully adhere to the “shareholder primacy” view, obliging directors to consider only shareholders’ financial interests (e.g. some Delaware’s precedents in takeover cases) while complying with the applicable law and ethical standards. This still requires attention to non-shareholders’ interests, but only to the extent that those interests may be relevant for the creation of long-term shareholder value.

  2. b. Close to the approach above, loyalty could be largely to shareholders’ financial interests but directors would have to consider stakeholders’ interests, and the social and environmental stakes of a company’s activity (e.g. the language in the French Civil Code). Consideration here might be interpreted as careful thought given to stakeholders’ interests to a degree that is equal or higher than well-established standards (such as those in the OECD Guidelines for Multinational Enterprises [MNE]) but still falling short of what a social planner would prefer for the society as a whole.

  3. c. A third approach would be to amplify the group of recipients of the duty of loyalty. Directors would therefore be equally devoted to shareholders and to a number of defined stakeholders, such as employees and customers. This may imply, in a concrete case, directors making a decision that would meaningfully reduce long-term shareholder value in order to benefit a group of stakeholders.

  4. d. At the other end of the spectrum, directors would need to balance shareholders’ financial interests with the best interests of stakeholders (just like in the third approach above), and, in addition, to fulfil a number of specified public interests (e.g. Public Benefit Corporations (PBC) in Delaware and société à mission in France).

Brazil’s company statute – Law 6 404 from 1976 – arguably adheres to item “b” above. Its Article 2 states that a company may have any business purpose as long as it is “for-profit and not contrary to the law, the public order and the morality”. Likewise, Article 154 of the same law broadly establishes directors’ duties are towards the company, and adds that directors should also satisfy “the requirements of the public good and the social function of the Company”. The same article’s paragraph 4 further clarifies that “the board and senior executives may authorise the practice of reasonable acts of generosity that benefit employees or the community where the company operates” (emphasis added).6 In a related provision (art. 116), the company law also establishes that controlling shareholders have “duties and responsibilities with all other shareholders, a company’s employees and the community where it operates, whose rights and interests the controlling shareholders should respect and fulfil” (emphasis added).7

The language in the Brazilian company law, however, may allow some flexibility in the interpretation of the directors’ fiduciary duties, and it is reasonable to assume that articles of association permitting a trade-off between long-term shareholder value and societal or environmental benefits may withstand court scrutiny. Nevertheless, only a small minority of public companies in Brazil report such a trade-off would be authorised by their articles of association (see Figure 6.3).

Zooming out from any individual legal system, there are positive aspects and drawbacks to all of the aforementioned models.

The model in item “a” above has a significant advantage: directors and key executives are clearly accountable to the sole goal of maximising shareholders’ wealth within what is legally and ethically permissible. This model still leaves significant discretion to managers – because what is ethically required and expected to increase long-term value may not be evident – but there are some relatively good proxies to assess management’s performance, such as equity prices and profits during a reasonable time period.

The main drawback of model “a” is that, if there are relevant market failures, the maximisation of profits by a company may reduce welfare for society as a whole or even the long-term value of its shareholders’ portfolios. With respect to society’s welfare, for example, if there are not adequate public policies to reduce GHG emissions, companies may emit more than what would be socially desirable with the goal of maximising profits. In regard to an investor’s portfolio, for instance, the wealth created by a profit-maximising major carbon emitter company may be more than off-set by losses in the long-term value of other investee companies affected by climate change (e.g. a hotel chain that would need to write off assets affected by rising sea levels).

Models “b”, “c” and “d” – with their own peculiarities – make an attempt at solving the challenge mentioned in the paragraph above. Recognising that contracts between the company and stakeholders are often incomplete, and that the state – especially in developing countries and with respect to highly complex industries – may not always be able to implement optimal or fully enforceable regulation, those three models impose a duty for corporate managers to consider or fulfil stakeholders’ and society’s interests. If managers have adequate incentives to consider or fulfil these interests, the solution of expanding the duty of loyalty might be advisable because directors and key executives are arguably the most well-informed individuals with respect to their company’s risks, opportunities and societal impact.

When compared to model “a”, however, the decision-making process of managers and the evaluation of their results may grow exponentially more complex in the other three models because non-financial results are extremely difficult to compare and value, both with other non-financial results as well as with financial results. For example, if a company faces the alternative between upgrading a factory to emit less 1 Mt CO2 a year or preserve 40 000 hectares of tropical forest, it may not be evident what the best option for society would be. The CO2 storage capacity of the forest could be estimated, but there would also be benefits – such as protecting biodiversity and water security with the forest preservation option – that are not straightforward to compare to CO2 storage. Moreover, there would also be the alternative of not adopting any of the two alternatives, which may increase profits and dividends to shareholders. This could allow the shareholders themselves to donate more money to an environmental philanthropic organisation or increase tax revenues that governments may use to support environmental objectives.

The greatest risk of models “b”, “c” and “d” is, therefore, threefold. First, managers would need to make decisions on projects that are not necessarily within their expertise. For instance, running efficiently a steelmaking business may have little to do with cost-effectively reforesting. While expertise can be developed internally or outsourced in some cases, at C-level positions and on the board new issues to consider will inevitably mean more time demand from individuals who may already struggle with a great number of responsibilities. Second, while the economics discipline has found creative ways to value public goods and human life, the technical and ethical challenges of doing so are seldom trivial. For example, it may not be difficult for a manager of a European company to assess the trade-off between profits and CO2 emissions, because the market for carbon permits is active in Europe, but it may be more challenging in other parts of the world. Third, if shareholders and stakeholders cannot properly compare financial and non-financial results, directors and key executives may become less accountable. In the same example, a CEO in a steel-making business may argue that below-average return on equity was due to a stellar environmental performance and not to her incompetency in leading the company.

While the risks summarised in the paragraph above may be to some extent manageable, this could still be costly and present at least one unintended consequence. With respect to costs, for instance, in order to increase managers’ accountability, companies may be required by legislators to hire an independent third-party to regularly verify whether management fulfilled their non-financial goals. The unintended consequences are difficult to assess because the number and size of companies with legally actionable non-financial goals – as seen in Chapter 7 – is still small, but one could observe the role courts may have in enforcing a broadened duty of loyalty such as in models “c” and “d”.

How common court cases involving managers’ duty to fulfil non-financial goals may depend on many factors (e.g. if only shareholders or others have a standing to sue,8 the standard of review adopted by the courts,9 and the extent to which a jurisdiction’s legal framework is conducive to the use of private enforcement), but the fact is that judges may eventually need to decide whether managers have abided by their broadened duty of loyalty. This control by the courts, however, might face limitations for the same reasons that may have justified – as argued above – broadening the fiduciary duties in the first place. If the executive and the legislative branches of government – with all their multidisciplinary experts and public consultations – were unable to enact optimal regulation to reduce market failures, it is an open question whether professionals with legal-training could do better when assessing corporate executives’ decisions. Moreover, as previously mentioned, evaluating trade-offs between non-financial goals may be technically or ethically challenging (e.g. closing a coal-fired power station that is the only source of employment in a poor community in order to fight climate change), and it is not clear-cut whether the courts (or, in the first place, directors and key executives) would have the social legitimacy to be the arbiter in those cases.

Finally, it should be noted that – as well explored in the G20/OECD Principles – directors are responsible for overseeing the company’s risk management, which involves “oversight of the accountabilities and responsibilities for managing risks, specifying the types and degree of risk that a company is willing to accept in pursuit of its goals, and how it will manage the risks it creates through its operations and relationships” (annotation to Principle VI.D.1). Evidently, therefore, if sustainability risks are financially material for a company, they would have to be properly managed by senior executives and overseen by the board as an expression of the duty of care (OECD, 2020, pp. 74-75[16]), despite any more complex discussion about the scope of the duty of loyalty. As shown in the figure below, there is evidence that boards of Brazilian public companies (especially in the large ones) have indeed took initiatives to better manage sustainability risks.


[11] Bebchuk, L. (2021), “Don’t Let the Short-Termism Bogeyman Scare You”, Harvard Business Review January – February 2021, https://hbr.org/2021/01/dont-let-the-short-termism-bogeyman-scare-you.

[8] Belsom, T. and L. Lake (2021), ESG factors and equity returns – a review of recent industry research, https://www.unpri.org/pri-blog/esg-factors-and-equity-returns-a-review-of-recent-industry-research/7867.article (accessed on  September 2021).

[10] Boffo, R. and R. Patalano (2020), ESG Investing: Practices, Progress and Challenges, OECD Paris, https://www.oecd.org/finance/ESG-Investing-Practices-Progress-and-Challenges.pdf.

[2] Business Roundtable (2019), Statement on the Purpose of a Corporation, https://s3.amazonaws.com/brt.org/BRT-StatementonthePurposeofaCorporationJuly2021.pdf (accessed on  2021).

[3] Fink, L. (2020), A Fundamental Reshaping of Finance, https://www.blackrock.com/corporate/investor-relations/2020-larry-fink-ceo-letter.

[5] Fisch, J. and S. Davidoff Solomon (2021), “Should Corporations have a Purpose?”, Texas Law Review, Forthcoming, U of Penn, Inst for Law & Econ Research Paper No. 20-22, European Corporate Governance Institute – Law Working Paper No. 510/2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3561164.

[1] Friedman, M. (1970), The Social Responsibility Of Business Is to Increase Its Profits, https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.

[15] OECD (2022), Climate Change and Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/272d85c3-en.

[14] OECD (2021), The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis, OECD Publishing, Paris, https://doi.org/10.1787/efb2013c-en.

[16] OECD (2020), OECD Business and Finance Outlook 2020: Sustainable and Resilient Finance, OECD Publishing, Paris, https://doi.org/10.1787/eb61fd29-en.

[9] Ratsimiveh, K. et al. (2020), ESG scores and beyond: Factor control: Isolating specific biases in ESG ratings, FTSE Russell, https://content.ftserussell.com/sites/default/files/esg_scores_and_beyond_part_1_final_v02.pdf.

[12] Roe, M. (2018), “Stock Market Short‐Termism’s Impact”, U. Pa. L. Rev., https://scholarship.law.upenn.edu/penn_law_review/vol167/iss1/3.

[7] S&P Global (2019), Exploring the G in ESG: Governance in Greater Detail – Part I, https://www.spglobal.com/en/research-insights/articles/exploring-the-g-in-esg-governance-in-greater-detail-part-i (accessed on  September 2021).

[4] Skog, R. (2015), The Importance of Profi t in Company Law – a Comment from a Swedish Perspective, De Gruyter, pp. 563-571.

[13] Strine Jr., L. (2017), “Who bleeds when the wolves bite? A flesh-and-blood perspectuve on hedge fund activism and our strange corporate governance system”, Yale Law Journal, Vol. 126, p. 1870, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2921901.

[6] Wheelan, T. et al. (2021), ESG and Financial Performance, https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf.


← 1. The business judgement rule acts as a presumption that the board of directors fulfilled its duty of care unless plaintiffs can prove gross negligence or bad faith. Similarly, if a director had a conflict of interest, the court will not typically uphold the presumption.

← 2. A review of 59 papers focused on the relationship between climate-related corporate results and corporate financial performance found a similar relationship as identified for ESG results more broadly: 57% arrived at a positive relationship, 9% mixed conclusions, 29% neutral impact and 6% a negative impact (Wheelan et al., 2021, p. 2[6]).

← 3. The total market capitalisation of these companies account for almost 83% of all publicly listed companies.

← 4. “Short-termism” could be defined as an investment-making process that favours projects with higher short-term cash inflows in detriment to projects with longer-term payoffs, without properly considering the net present value of all possible investment projects.

← 5. Some company laws merely mention that directors should act in the best interest of the company, but, evidently, companies are only fictional persons, and, therefore, regulators, courts and other practitioners will have to – in concrete cases – define to whom the company effectively serves.

← 6. In the original: Art. 154 – “O administrador deve exercer as atribuições que a lei e o estatuto lhe conferem para lograr os fins e no interesse da companhia, satisfeitas as exigências do bem público e da função social da empresa. [.] § 4º O conselho de administração ou a diretoria podem autorizar a prática de atos gratuitos razoáveis em benefício dos empregados ou da comunidade de que participe a empresa, tendo em vista suas responsabilidades sociais”.

← 7. In the original: Art. 116, parágrafo único – “O acionista controlador deve usar o poder com o fim de fazer a companhia realizar o seu objeto e cumprir sua função social, e tem deveres e responsabilidades para com os demais acionistas da empresa, os que nela trabalham e para com a comunidade em que atua, cujos direitos e interesses deve lealmente respeitar e atender”.

← 8. In Brazil, only shareholders may file a civil lawsuit on behalf of the company against corporate officers (i.e. to file a derivative action – Article 159 of Law 6 404 from 1976). However, any shareholder or stakeholder who can prove to have suffered a loss would have a standing to sue directly corporate officers for the violation of their duties.

← 9. As previously mentioned, if courts adopt the business judgement rule (as they often do in Brazil), they would review directors’ decisions only in the relatively rare circumstances where plaintiffs can prove negligence or bad faith.

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