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What Shareholder Derivative Suits Tell Us about the Importance of the “E”, “S” and “G” in ESG

Posted on: January 14, 2022

What Shareholder Derivative Suits Tell Us about the Importance of the “E”, “S” and “G” in ESG

Companies have a duty to their employees, shareholders, and other stakeholders to provide a safe and secure workplace. They are expected to have policies and procedures to protect workers from discrimination and harassment, among other things, and to implement ESG-related programs that help build a strong culture and that can be tracked, measured, monitored, and reported for progress.

These facts have been highlighted in recent years in several high-profile cases filed and investigations conducted. In particular, shareholder derivative actions of the past two years, indicative of the post #metooworkplace, are alleging that directors and officers have breached their fiduciary duties of care or of loyalty to the company because they failed to monitor, or address known “red flags.”

Shareholder Derivative Lawsuits

In November, 2021, shareholder rights law firm Johnson Fistel LLP announced that the firm is seeking shareholders for their investigation of potential claims on behalf of Tesla Inc. against a number of the company’s directors and officers. The investigation stems from a Tesla employee’s allegation that her colleagues and managers subjected her to severe and pervasive harassment on a near-daily basis.

 

The claims against Tesla’s directors and officers are not unique. There are currently lawsuits against several of Activision Blizzard Inc.’s current and former directors and officers on a similar set of facts in California Superior Court and the U.S. District Court for the Central District of California. Likewise, there was a derivative lawsuit this past year against Nike based on allegations of a “boy’s club” culture, and that the board and several officers “engaged in, facilitated, and knowingly ignored the hostile work environment.”

 

In 2020, Google settled a consolidated derivative lawsuit with one of the highest ever nominal dollar values for the company’s alleged mishandling of sexual harassment allegations against senior executives and the company’s overall alleged culture of sexual discrimination and harassment. Google parent Alphabet established a $310 million diversity, equity, and inclusion fund as part of the settlement, which is subject to court approval, and agreed to adopt extensive reforms to its employment policies and to implement several governance reform measures.

 

The Importance of ESG

Environmental, Social and Governance (“ESG”) programs consider a company’s impact on its employees, directors, customers, partners, investors, and the communities in which it operates (“stakeholders”). While the precise definition of each of these buckets may vary, a company’s commitment to ESG and performance against these commitments provide an important set of metrics by which all stakeholders can assess a company’s culture, its ability to deliver value, its risk profile and potential growth opportunity, and importantly, its ability to perform its fiduciary duties.

Environmental: The “E” in ESG refers to a company’s impact on the environment both through its direct operations and its indirect operations through its supply chain. This impact is measured by production inputs (such as the use of renewable energy sources or recycled materials like plastics) and by production outputs (such as the reduction of greenhouse gas or carbon emissions). Other areas of environmental impact and performance metrics include energy efficiency, water conservation, waste reduction, and climate change.

Social: The “S” in ESG refers to a company’s impact on social institutions and human relationships, including equity, diversity, and inclusion; compliance and ethics, including labor conditions, wages, and benefits; workplace and board diversity; racial, social, and organizational justice; human rights; and stakeholder and community relations. The nature of a company’s “social” initiatives is a good indication of its workplace tenor: “In looking at examples of ‘S’ practices among businesses, it was also evident that these practices are a barometer for corporate culture. Where companies have a strong and shared culture across the organization, ‘S’ practices tend to be strong. Where a culture is poor, or considered ‘toxic’, ‘S’ tends to follow the same pattern,” a group of FTI Consulting executives wrote in a 2020 article of the Harvard Law School Forum on Corporate Governance.

Governance: The “G” in ESG refers to a company’s governance and oversight of this area, like board composition and structure, oversight and compliance, executive compensation, political contributions and lobbying, and bribery and corruption. Stakeholders look to a company’s governance, including policies and procedures related to shareholder rights, to assess its culture and its risk profile, particularly as it relates to investors and shareholders.

An ESG strategy that is aligned with a company’s mission and values demonstrates its commitment to delivering on purpose, people, and profit.

The Importance of Workplace Investigation to ESG

Now more than ever, companies must show they are committed to all their stakeholders.

At TRIBU Partners, we believe superior workplace investigations, grounded in fair, compliant, rigorous, and consistent practices, contribute to a positive workplace culture. We believe that preparing your internal investigative team is a key component to building and sustaining a corporate culture of integrity and ethics aligned with your corporate values and ESG best practices.

To assist our clients, we have developed TRIBU Inside, a unique program that provides a comprehensive and thorough audit of your organization’s internal investigations protocol, procedures, documentations, and reporting to ensure compliance with best practices, rigor in analysis, and fairness and consistency in results. Our dedicated team will provide a detailed report identifying vulnerabilities, areas for improvement, and recommendations to ensure fairness and trust in the investigation process, and to mitigate risk.

Contact Us Today for a Complimentary Consultation

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