The Legal 500: Environmental Social and Governance Comparative Guide

Preserving Directors’ Business Judgment Despite Encroaching ESG Mandates

Last year in their “Hot Topic” for the Legal 500 U.S. Country Comparative Guide on Environmental, Social and Governance (commonly referred to as “ESG”), Dechert partners Rick Horvath and Stephen Leitzell discussed how imposing a duty to monitor ESG business risks pursuant to the duty of oversight would be “A Trojan Horse Attack on the Business Judgment Rule.” Specifically, they argued last year that if directors of corporations owe a duty to oversee ESG business risks, the still amorphous nature of ESG and the challenges inherent in deciding whether, in retrospect, Boards were adequately overseeing ESG risks would combine to undermine the business judgment rule. They argued that Boards weary of litigation risk would end up devoting more time to documenting compliance with ESG principles, and in so doing would likely impair the entrepreneurial principles foundational to modern corporate law. It was their view that instead of extending the duty of oversight to encompass business risks associated with ESG, the more proper course—and one consistent with well-settled principles of corporate law—would be to ground the decision to adopt ESG strategies and to manage ESG risks firmly within the rubric of the business judgment rule, and not the duty of oversight.

In this annual update to last year’s “Hot Topic” piece, Mr. Horvath and Mr. Leitzell affirmed their argument in light of developments from the past year, including both the final rule passed by the SEC mandating new climate related disclosures and developments in the Delaware Court of Chancery since last year’s article.