“What publicity can do: the benefits of
corporate environmental audits”
[REMOVED BY EDITOR]
Word count (excluding footnotes): 10,663
12 December 2013
2
ABSTRACT
This paper advances the argument that corporate governance law should include public
and independent environmental audits in order to improve corporate treatment of the
environment. Part I posits that since the norm of shareholder value maximization is
undermined by the business judgment rule, the rule for enforcing shareholder claims
against the corporation, similar norms requiring corporations to improve their treatment
of the environment will suffer from similar weaknesses. Rather, shareholder value
maximization is enforced through non-legal forces. Consequently, corporate governance
should leverage non-legal forces to improve corporate treatment of the environment on
the principle that ‘sunlight is the best disinfectant.’ Part II proposes a system of public
and independent environmental audits. It first surveys current methods of environmental
information production and proposes a way of thinking about a more robust system
mandated by law.
3
What publicity can do: the benefits of corporate environmental
audits
Table of Contents
INTRODUCTION
4
PART I
5
1. PROBLEMS WITH ENFORCING A FIDUCIARY DUTY TO MAXIMIZE PROFITS
5
1.1 SHAREHOLDER PRIMACY
6
1.2 WHY THE BUSINESS JUDGMENT RULE MAKES THE DUTY IMPOSSIBLE TO PERFECTLY ENFORCE.
8
1.3 OTHER REJECTIONS OF SHAREHOLDER PRIMACY
12
1.4 ECONOMIC SANCTIONS: ENFORCING SHAREHOLDER PRIMACY.
15
1.5 CONCLUSION
17
2. PROBLEMS WITH ENFORCING A FIDUCIARY TO DUTY MINIMIZE ONE’S IMPACT ON THE
ENVIRONMENT
18
2.1 WHY A FIDUCIARY DUTY IS DIFFICULT TO ENFORCE
18
2.2 WHY A FIDUCIARY DUTY IS UNDESIRABLE
22
3. WHY WE SHOULD FOCUS ON ENVIRONMENTAL AUDITS
24
3.1 WHY SOCIAL AND MORAL SANCTIONS ARE REQUIRED
25
3.2 WHY ENVIRONMENTAL AUDITS CAN EXPOSE CORPORATE ACTORS TO SOCIAL AND MORAL
SANCTIONS
30
4. CONCLUSION
31
PART II
32
1. THE CURRENT SYSTEM
1.1 LEGISLATED DISCLOSURES – SECURITIES REGULATION
1.2 INDUSTRY ASSOCIATIONS AND VOLUNTARY DISCLOSURE
1.3 ISO ENVIRONMENTAL STANDARDS
1.4 ENVIRONMENTAL CONSULTING
1.5 BRINGING THE CURRENT SYSTEM TOGETHER
2. REFORM: AN ANALOGY WITH FINANCIAL AUDITS
2.1 WHY AN ANALOGY TO FINANCIAL AUDITS?
2.2 THE FIVE QUESTIONS: WHO? WHAT? WHEN? WHERE? HOW?
3. FURTHER CONSIDERATIONS
33
33
36
38
39
41
41
41
44
47
CONCLUSION
48
BIBLIOGRAPHY
50
4
INTRODUCTION
Through this paper, I hope to contribute to a conversation about how best to incentivize,
convince, or compel (as the case may be) corporate actors to treat the environment better.
My argument is based on the assumption that better treatment of the environment is
desirable. The question is therefore about instrument, not objective. To focus my inquiry,
I will respond to Professor Gail Henderson’s proposal to expand legal obligations for
corporate actors to consider the environment.1 She proposes to subject corporate directors
to a fiduciary duty to minimize one’s impact on the environment. I will argue for a
different instrument: audits. My thesis is that that mandating independent and public
environmental audits will significantly improve corporate actors’ treatment of the
environment.
I have built my argument by investigating the norms and other incentives that
influence the behavior of corporate actors. I have applied Professor Einer Elhauge’s
landmark analysis2 to the question of how we can incentivize corporate actors to be more
careful of their environmental impact. Throughout this paper, the reader should be
mindful of Elhauge’s categories of norms: legal, economic, and social and moral. While a
fiduciary duty to minimize one’s impact on the environment is exclusively legal, I will
demonstrate that mandating environmental audits is justified by legal, economic, and
social and moral considerations.
My argument is structured in two parts. In the first part, I will demonstrate why a
legal fiduciary duty is neither necessary nor sufficient to compel environmentally
See Gail Henderson, “A Fiduciary Duty to Minimize the Corporation’s Environmental
Impacts” (2013) 9:3 Intl Comp Corp LJ 67.
2
Einer Elhauge, “Sacrificing Corporate Profits in the Public Interest” (2005) 80:3 NYU
LR 733.
1
5
responsible corporate behavior, and why a legally mandated regime of environmental
audits is preferable. First, I will demonstrate that shareholder primacy is often legally
unenforceable, but that this duty is enforced through economic forces. Second, I will
outline the problems with enforcing a fiduciary duty to minimize one’s impact on the
environment. Third, I will argue that environmental audits are more suitable for shaping
how corporations treat the environment. In the second part, I will propose a regime of
environmental audits. In the first section, I will survey different ways in which
environmental information is currently produced. In the second section, I will propose
that we think of environmental audits in the same way as we think of financial audits.
Throughout the paper I will illustrate my argument with a scenario borrowed from
Elhauge’s paper: clear-cutting.3 I will suggest how a clear-cutting company, Timber Co,
would find itself situated at the various stages of the argument. Timber Co’s is not
particularly environmentally motivated, both in the sense that the board is not overly
aggressive in externalizing its costs onto the environment, but it also does not take
extraordinary measures to ensure to minimize its environmental impact. I will further
assume that this company’s shares are widely held. In other words, the company has a
few large institutional shareholders and several dissipated individual shareholders.
PART I
1. Problems with enforcing a fiduciary duty to maximize profits
I must first establish that the traditionally dominant doctrine in corporate law, that of
shareholder primacy, is not legally enforceable in many cases. In other words,
shareholders are weak in legally enforcing their primacy. I will first briefly explain
3
Ibid at 735-736.
6
shareholder primacy. I will then argue that the business judgment rule, the test for
enforcing shareholder primacy, as articulated in Delaware4 makes the doctrine impossible
to perfectly enforce. Third, I will demonstrate how the doctrine of shareholder primacy
has been largely abandoned by Canadian legislation and case law, further neutering a
legal norm of profit maximization in Canada. Finally, the above argument does not
attempt to prove that corporations do not maximize profits. Rather, it seeks to establish
that law is not the prime enforcer of the doctrine of shareholder primacy. Economic
sanctions, rather than legal sanctions, explain why corporate directors and managers
continue to seek profits.
1.1 Shareholder primacy
The doctrine of shareholder primacy has long been the established doctrine in corporate
law.5 The doctrine holds that corporate directors and managers have a fiduciary duty to
maximize shareholder value while complying with other laws and regulations.6 The
Dodge v Ford Motor Co7 court famously articulated the doctrine thus:
4
Delaware is important because it is perhaps the most influential jurisdiction for common
law corporate case law. See Elhauge, supra note 2 at 738. Professor Elhauge describes
Delaware as “the eight-hundred-pound gorilla of corporate law”.
5
Elhauge, supra note 2 at 736, calls this the “canonical law and economics account”.
6
See e.g. Elhauge, supra note 2 at 736; see also Leonard Ian Rotman, Fiduciary Law
(Toronto: Thomson Carswell, 2005) at 420-25 for a discussion of the debate in the 1930’s
between Adolf A Berle Jr, a contractarian, and E Merrick Dodd Jr, an anti-contractarian,
and the subsequent emergence of the shareholder primacy doctrine. For the debate itself,
see AA Berle, Jr, “Corporate Powers as Powers in Trust” (1931) 44 Harv L Rev 1049;
and E Merrick Dodd, Jr, “For Whom are Corporate Managers Trustees?” (1932) 45 Harv
L Rev 1145.
For a 1970s articulation of the shareholder primacy argument, see also Milton Friedman,
“The Social Responsibility of Business Is to Increase its Profits”, The New York Times
(13 September 1970) 32; Jonathan R Macey & Geoffrey Miller, “Corporate Stakeholders:
A Contractual Perspective” (1993) 43 UTLJ 402-403. See also Henderson, supra note 1
at 77-82 for a review of the arguments in favor of shareholder primacy.
7
Dodge v Ford Motor Co 170 NW 668 (Mich 1919) [Dodge].
7
“A business corporation is organized and carried on primarily
for the profit of the stockholders. The powers of the directors
are to be employed for that end. The discretion of directors is
to be exercised in the choice of means to attain that end, and
does not extend to a change in the end itself, to the reduction of
profits, or to the nondistribution of profits among stockholders
in order to devote them to other purposes.”8
Arguments in favor of shareholder primacy usually come from contractarian
scholars. Contractarians view the corporation as a ‘nexus of contracts’. As Professor
Jonathan R Macey puts it: “Every facet from beginning to end is organized around
contracts”.9 Shareholders are the owners of corporations, such as Timber Co, and
contractually nominate directors and managers as their agents. These agents then go
about managing the shareholder’s assets: hiring employees, negotiating supply contracts,
sale contracts, real estate transactions, machinery leases, or whatever else Timber Co may
require. All activity must be for the benefit of the owners of the corporation, the
shareholders. In his oft-cited 1970 New York Times piece, “The Social Responsibility of
Business is to Increase its Profits,” Milton Friedman argued that to pursue goals other
than profit maximization would be to infringe on shareholder rights. If the Timber Co
board decided to undertake some non-profit activity with the corporation’s money, such
as building a school in its community, then it “would be spending someone else’s money
for a general social interest.”10 Since the board members are the shareholders’ agents,
they have no right to use corporation resources without some sort of mandate from
shareholders.
8
Dodge, supra note 7 at 684.
Jonathan R Macey, Corporate Governance (Princeton University Press, 2008) at 18.
10
Friedman, supra note 6 at 33.
9
8
That is the shareholder primacy doctrine in a nutshell. If the directors and
managers lower Timber Co’s potential profits by replanting areas of the forest or
declining to clear-cut in certain areas, then Timber Co’s shareholders would be entitled to
a legal remedy. Shareholders are the corporation’s raison d’être and all activity should
further their interests; maximizing the company’s value.
1.2 Why the business judgment rule makes the duty impossible to perfectly enforce.
However, shareholder primacy is not easy to enforce through legal action.11 The test that
shareholders must satisfy, the ‘business judgment rule,’ provides corporate directors and
managers with wide discretion to sacrifice profits and escape legal sanctions. Moreover,
this discretion does not result from some statutory or jurisprudential relaxation of the
rule. The rule has been weak since its birth. Two cases demonstrate just how weak the
rule has been in the past: Dodge and Shlensky v Wrigley12.
Dodge was one of the earliest shareholder primacy cases. Henry Ford founded the
Ford Motor Company in 1903 together with some business associates, among whom
were the Dodge brothers, John and Horace.13 FMC saw sales explode in the early 20th
century, resulting in very large profits. Mr. Ford, as the company’s president, stopped
11
I will leave aside any discussion of other objections to the shareholder primacy rule.
Normative arguments could be made regarding the desirability of directors’ and
managers’ duty to maximize profits, but I will stick to a discussion of whether such a
duty is even enforceable in the first place. See also D Gordon Smith, “The Shareholder
Primacy Norm” (1998) 23:2 J of Corp Law 277 at 280: “The assumption that the
shareholder primacy norm is a major factor in the ordinary business decisions of boards
of directors of modern, publicly traded corporations is pervasive in modern corporate law
scholarship. The influence of the shareholder primacy norm seems so obvious that
arguments among corporate law scholars typically leapfrog over descriptive aspects of
the debate and rush straight to the normative question: should corporate law require profit
maximization?”
12
Shlensky v Wrigley, 237 NE (2d) 776 (Ill. 1968) [Wrigley].
13
Dodge, supra note 7 at 668.
9
paying special dividends to shareholders because he wanted to finance an expansion of
operations, including the acquisition of an iron ore mine and a smelter, and an increase in
employment in the area.14 The court ordered Mr. Ford to announce dividends, holding
that Ford Motor Co had more money than it needed to finance its business expansion.15
Mr. Ford was required to announce dividends for the excess amount between what Ford
Motor Co had and what he claimed it needed for the business expansion.
However, Dodge demonstrates the duty of loyalty as it relates to conflict of
interest, not as it relates to shareholder primacy. Elhauge suggests that Ford likely
suspended dividends to depress stock prices so that he could squeeze out the Dodge
brothers at a favorable price (which eventually happened).16 The court held that this move
was a violation of Mr. Ford’s duty of loyalty not to use his corporate control to benefit
himself financially at the expense of other shareholders.17 Not mentioned in the case is
that the Dodge brothers had recently set up their own firm to compete with Ford.18
Additionally, the decision never stated that directors’ exclusive duty is to maximize
shareholder profits.19 Instead, the corporation must “primarily” have shareholder profits
in mind, meaning that directors cannot “conduct the affairs of a corporation for the
merely incidental benefit of shareholders and for the primary purpose of benefitting
others … .”20 That is a far cry from using the case as evidence for shareholder primacy.
14
Ibid at 683-685.
Ibid at 685.
16
Elhauge, supra note 2 at 774.
17
Ibid.
18
M Todd Henderson, “The Story of Dodge v Ford Motor Company: Everything Old is
New Again” in J Mark Ramseyer eds, Corporate Law Stories (Foundation Press 2009) at
37.
19
Elhauge, supra note 2 at 772-773.
20
Dodge, supra note 7 at 684.
15
10
Wrigley grants even more deference to corporate directors. Mr. Wrigley, 80%
owner and director of the Chicago Clubs baseball team, refused to install lights on
Wrigley field. Mr. Wrigley refused to do so on the basis of his opinion that baseball is a
daytime sport and that the installation of lights would have a deteriorating effect upon the
surrounding neighborhood.21 Every other baseball team had installed lights for the
purpose of increasing attendance and revenue but Mr. Wrigley still refused, even
admitting that he “is not interested in whether the Cubs would benefit financially” from
lights.22 In short, Wrigley contained the perfect facts to make the claim that the corporate
director (Mr. Wrigley) was not maximizing shareholder value. But the court refused to
grant relief to the minority shareholders, instead holding that profit-sacrificing motives
other than fraud, illegality or conflict of interest (such as in Dodge) were irrelevant.23
Wrigley, too, suggests that shareholders are not able to effectively enforce the primacy
granted to them by the canon of corporate law.
The courts’ deference to directors is known as the business judgment rule. In its
recent iterations, Delaware case law has upheld that deference. For example, in 2008 the
Delaware Court of Chancery held in Postorivo v AG Paintball Holdings Inc Chancery
that:
“[c]ourts generally will not substitute the judgment of a judge
for that of a board. Rather, a judge ensures that the board made
the business judgment with a disinterested and independent
mindset. Therefore, the courts avoid questioning the merits of
a director’s decision, but examine instead the allegations
questioning the motivation fueling the decision”.24
21
Wrigley, supra note 12 at 778.
Ibid at 777-778.
23
Ibid at 780.
24
Postorivo v AG Paintball Holdings Inc, 29 Del Ch Lexis (2008) at 13, 2008 WL
553205 at 4 (Del Ch Feb 29 2008) [Postorivo]; see also Beam v Stewart, 845 A.2d 1040,
22
11
Pursuant to Postorivo plaintiff shareholders will face obstacles similar to those faces by
the plaintiff shareholders in Wrigley: they must prove that directors had some improper
motive. Recent Delaware case law thus continues to give shareholders a hard time
enforcing any duty directors might have to maximize profits for their advantage.
The exception is change of control situations. In Unocal Corp. v. Mesa Petroleum
Co.25 and Revlon Inc. v. MacAndrews & Forbes Holdings26 the Delaware courts held that
decisions of a board should be subject to “enhanced scrutiny” when the company is in a
change of control situation, such as a hostile takeover. Directors in these situations are
under a duty to maximize shareholder value; to sell the company to the highest bidder.
The reason is that in anti-takeover situations there is the “the omnipresent specter that a
board may be acting primarily in its own interests, rather than those of the corporation
and its shareholders . . ."27 At this point the board must demonstrate that it had
“reasonable grounds for believing there was a danger to corporate policy and
effectiveness, a burden satisfied by a showing of good faith and reasonable
1048 (Del. 2004): the business judgment rule is “a presumption that directors were
faithful to their fiduciary duties”; In re Walt Disney Co Derivative Litig, 906 A.2d 27, 52
(Del. 2006), Am Soc’y for Testing & Materials v Corrpro Cos, 487 F.3d 557, 572, (3d
Cir. 2007): the business judgment rule is “a rule of law that ‘insulates an officer or
director of a corporation from liability for a business decision made in good faith if he is
not interested in the subject of the business judgment, is informed with respect to the
subject of the business judgment to the extent he reasonably believes to be appropriate
under the circumstances, and rationally believes that the business judgment is in the best
interests of the corporation.”; In re infoUSA Inc S’holders Litig, 953 A.2d 963, 984 (Del
Ch 2007): Courts do “not safeguard shareholders by substituting the opinion of a judge
for that of a business person merely because a plaintiff shows up at the courthouse asking
for relief.”
25
493 A.2d 946 (Del. Sup. Ct. 1985) [Unocal].
26
506 A.2d 173 (Del. Sup. Ct. 1986) [Revlon].
27
Unocal, supra note 25 at 954.
12
investigation.”28 While under the business judgment rule boards are presumed to have
acted in good faith, boards are subject to a reasonableness review when a change of
control situation activates their Revlon duties.
Consequently, the business judgment rule weakens the doctrine of shareholder
primacy considerably. As Elhauge puts it: “Because just about any decision to sacrifice
profits has a conceivable link to long-term profits, this suffices to give managers
substantial de facto discretion to sacrifice profits in the public interest.”29 In other words,
while a doctrine of shareholder primacy may exist, the business judgment rule
undermines its enforcement. We can thus conclude that the doctrine of shareholder
primacy is legally unenforceable to the extent that corporate directors and managers have
discretion in spending the corporation’s profits.
1.3 Other rejections of shareholder primacy
While the traditional rule elaborated in Dodge, Wrigley, and the Delaware case law
already weakens the enforceability of shareholder primacy, Canadian law goes even
further in permitting corporate directors and managers to consider non-shareholder
interests. Canadian legislation pegs corporate directors’ allegiance to the corporation,
rather than shareholders as individuals. Canadian case law must then answer the question:
what are the best interests of the corporation? The short answer is: 1) the best interests of
the corporations are much wider than simply the pecuniary interests of individual
shareholders; and 2) the board must determine the best interests on an ongoing basis.
Canadian corporate directors and managers find the source of their fiduciary
obligations in section 122(1)(a) of the Canada Business Corporations Act, which reads:
28
29
Revlon, supra note 26 at 180; see also Unocal, supra note 25 at 955.
Elhauge, supra note 2 at 771.
13
“[e]very director and officer of a corporation in exercising their powers and discharging
their duties shall [...] act honestly and in good faith with a view to the best interests of the
corporation.”30 Canadian law has therefore not explicitly incorporated shareholder
primacy into its corporate law; rather, the matter hinges on the interpretation of ‘best
interests of the corporation’.
While shareholder primacy informed Canadian corporate law in the past,31 the
Supreme Court of Canada’s decision in Peoples Department Stores Inc (Trustee of) v
Wise32 in 2004 and BCE Inc v 1976 Debentureholders33 in 2008 signaled a marked
divergence from shareholder primacy in Canadian corporate law. While the Court in
Peoples noted that “[t]his appeal does not relate to the non-statutory duty directors owe to
shareholders”, it did clarify that “the phrase the ‘best interests of the corporation’ should
be read not simply as ‘the best interests of the shareholders.’”34 The Court in Peoples
summarized its decision as follows:
“We accept as an accurate statement of law that in determining
whether they 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.”35
30
Canada Business Corporations Act, RSC 1985, c C-44, s 122(1)(a) [CBCA].
See Sarah P Bradley, “BCE Inc v 1976 Debentureholders: The New Fiduciary Duties
of Fair Treatment, Statutory Compliance and Good Corporate Citizenship?” (2010) 41:2
Ottawa L Rev 325 at para 10: “It is uncontroversial to observe that the shareholder
primacy model informed much of the early development of our system of corporate laws,
or that, perhaps until recently, it was clearly understood to be the law in Canada.” See
also J Anthony VanDuzer, The Law of Partnerships and Corporations, 2d ed (Toronto:
Irwin Law, 2003) at 271-72.
32
Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68, [2004] 3 SCR 461
[Peoples].
33
BCE Inc v 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560 [BCE].
34
Peoples, supra note 32 at para 42.
35
Ibid.
31
14
The Court’s decision in Peoples thus marked a divergence from the doctrine of
shareholder primacy and gives much hope for environmental causes in particular.
However, the decision left many questions unresolved. For example, under which
circumstances could a board consider stakeholders?
The Court took the opportunity to clarify some of these questions when it heard
BCE in 2008. The decision in BCE involved a leveraged buy-out that would lower the
long-term value of the company’s debentures. The debenture holders argued that the
directors did not consider their interests in a fair and balanced way.36 The Court held that
while directors owe a fiduciary obligation only to the corporation, a director must act in
the “best interests of the corporation viewed as a good corporate citizen.”37 Additionally,
the Court held that the phrase ‘best interests of the corporation’ means that: “Directors,
acting in the best interests of the corporation, may be obliged to consider the impact of
their decisions on corporate stakeholders, such as the debenture-holders in these
appeals.”38 This dictum suffers from ambiguities, such as what is meant by ‘may be
obliged.’39 Additionally, the Court adds a qualifier to the ‘best interests of the
corporation’ in the very same paragraph, holding that “This is what we mean when we
speak of a director being required to act in the best interests of the corporation viewed as
a good corporate citizen.”40 The introduction of ‘good corporate citizen’ could provide a
basis on which directors could act in the interests of stakeholders. Whatever ‘good
36
BCE, supra note 33 at para 32.
Ibid at para 66.
38
Ibid.
39
Edward Iacobucci, “Indeterminacy and the Canadian Supreme Court's Approach to
Corporate Fiduciary Duties" (2009) 48 Canadian Business Law Journal 232 at 244-245.
See also Bradley, supra note 30 at para 45.
40
BCE, supra note 33 at para 66.
37
15
corporate citizen’ means, the point is clear: shareholder primacy is not longer the guiding
principle in Canadian corporate law.
In addition to the license granted by the case law to consider stakeholders,
directors also benefit from a statutory defense. Section 123(5) of the CBCA grants
directors a defense of good faith. Given the ambiguities left in BCE as to when directors
‘may be obliged’ to consider stakeholders41, directors can now adopt many courses of
action ‘in good faith’ to the best interests of the corporation. The good faith defense thus
further dilutes the doctrine of shareholder primacy in Canada.
Canada therefore cannot be said to have a robustly enforceable legal duty to
maximize shareholder value. The combination of the business judgment rule, the
definition of ‘the best interests of the corporation’ in Peoples and BCE, and the good faith
defense in section 123(5) of the CBCA ensure that directors can consider stakeholders in
their business decisions.
1.4 Economic sanctions: enforcing shareholder primacy.
If corporate directors and managers do not have an enforceable legal obligation to
maximize profits, then why do they continue to do so? Why do the directors of Timber
Co continue to seek the profits even though they could likely escape legal sanctions? Part
of the answer might be the possibility of legal sanctions. But that is unlikely in Canada,
for the reasons explained above. Instead, the bulk of the answer lies in economic
sanctions. As Einer Elhauge puts it: “The discretion to sacrifice profits is instead
powerfully limited by managerial profit-sharing or stock options, product market
See also Jeffrey Bone, “Corporate Environmental Responsibility in the Wake of the
Supreme Court Decision of BCE Inc and Bell Canada” (2009) 27 Windsor Rev Legal Soc
Issues 5 at 30: after BCE, Bone argues that directors can pursue objectives that include
“long-term sustainability as an entrenched value”.
41
16
competition, the labor market for corporate officials, the need to raise capital, the threat
of takeovers, and the prospect of being ousted by shareholder vote.42 I will elaborate on
three factors: voting rights, the market for corporate control, and corporate finance.
Shareholders are still dominant where it matters most: voting rights.43 The
directors of Timber Co still answer to its shareholders. The directors and managers of
Timber Co derive their powers from a continued renewal of them by shareholders. The
threat to a directors’ corporate survival comes from the labor market for corporate
officials. If Timber Co’s profits begin to slack, then its shareholders will start questioning
whether it would not be preferable to replace the CEO with the former CEO of Lumber
Co, who is conveniently out of work and has a great track record of delivering profits.
The corporate board and officers thus have some skin in the game. They must pursue
profits or the shareholders will send them packing.
Second, publicly traded companies must constantly concern themselves with the
market for corporate control.44 Suppose that in quarter 4 of 2013 Timber Co’s board
decides not to clear-cut a piece of forest because the environmental damage would be
unpalatable. Lumber Co may decide to clear-cut that land instead. For quarter-4 of 2013
Timber Co’s profits will be lower than Lumber Co’s. Analysts will say nasty things in an
earnings call and Timber Co’s share price will fall. With Timber Co’s price depressed, it
becomes vulnerable to a takeover bid. Lumber Co may offer Timber Co’s shareholders a
premium on its current price since it believes much more money could be made with
42
Elhauge, supra note 2 at 840.
While shareholder passivity and collective action problems diminish the influence of
certain shareholders, I will deal with those problems below.
44
See generally, Henry G. Manne, “Mergers and the Market for Corporate Control”
(1965) 73:2 J of Pol Econ 110.
43
17
Timber Co’s assets. The company has all of the equipment to clear-cut, it simply refrains
from doing so in certain situations. Consequently, publicly traded companies face market
pressure to either engage in profit-maximizing activity or be taken over by a company
that will maximize profits.
Third, companies need financing. The facts in Peoples are a good example. When
the Wise brothers bought Peoples Department Stores (“Peoples”) from Marks & Spencer
Canada Inc. (“M&S”), M&S took Peoples’ assets “as security and negotiated strict
covenants concerning the financial management and operation of the company.”45 One of
those covenants was that the Wise brothers could not amalgamate the two companies
until the purchase price had been paid.46 Consequently, Wise was pushed to maximize
profits as much as possible to escape the burdens of financing its acquisition.
Enforceable legal sanctions are therefore not necessary to enforce profit
maximization. Economic sanctions act as a sufficient substitute, subject to any
intervening market inefficiencies or failures, by placing market pressures on the corporate
actors to maximize profits.
1.5 Conclusion
The doctrine of shareholder primacy is not a robustly enforceable legal duty to maximize
profits, but this duty may be economically enforceable. The business judgment rule first
dilutes the duty by allowing broad discretion to directors and a presumption of good faith.
Furthermore, Canadian law has given explicit support for directors to consider
stakeholders and has even provided an opening to argue that there are situations in which
they are obligated to consider stakeholders. However, economic sanctions are much more
45
46
Peoples, supra note 32 at para 11.
Ibid.
18
effective in enforcing profit maximization. The result is that companies continue to
maximize profits notwithstanding the absence of a robust legal obligation to do so.
2. Problems with enforcing a fiduciary to duty minimize one’s impact on the
environment
Having proven the weakness of enforcing a legal duty to maximize shareholder profits, I
will now demonstrate the difficulties in enforcing a fiduciary duty to minimize one’s
impact on the environment. I will begin by discussing the problems in enforcing such a
fiduciary duty. Second, I will address the duty’s purported benefits.
2.1 Why a fiduciary duty is difficult to enforce
A fiduciary duty to minimize one’s impact on the environment will be just as difficult to
enforce, if not more difficult, than the duty to maximize shareholder profits. Professor
Henderson acknowledges that fiduciary duties for corporate directors are difficult to
enforce.47 However, she argues that this difficulty is not fatal because: 1)
environmentally-minded shareholders might bring derivative suits; and 2) socially
responsible institutional investors will play an important role in monitoring compliance.
However, I argue that a fiduciary duty will be confusing, will create conflicts of interest,
that even well-financed environmentally-minded shareholders will have difficulties
bringing successful derivative actions, and that the participation of institutional investors
is not sufficient to enforce the duty.
A fiduciary duty to minimize one’s impact on the environment will be confusing
because the term “minimize” is always relative to some sort of baseline. From which
basis would directors have to minimize their corporation’s environmental footprint? One
47
Henderson, supra note 1 at 92.
19
interpretation could be that a director will have discharged her duty if she successfully
reduces her corporation’s environmental footprint to a minimum, where minimum is
defined as the footprint her particular industry requires to continue operations. A second
interpretation could be that each prospective decision must minimize its environmental
impact. A third interpretation still could be that a director must continuously reduce her
corporation’s environmental impact. Each interpretation has dramatically different
implications. On the first interpretation, Timber Co can continue to pollute the
environment as long as it and the rest of the timber industry demonstrate that they cannot
otherwise continue operations. On the second, Timber Co might have to factor the
environment into future business decisions, but its underlying environmental footprint
remains. On the third, Timber Co may be forced to cease clear-cutting operations
altogether and forced to move into some other industry, since moving into a different
industry would continue to reduce its environmental impact. Since companies operate in
industries with varying environmental implications, each will be held to a different
standard. The duty is confusing because it fails to clarify these questions.
Second, even if we could provide a definition for “minimize”, the duty creates
conflicts of interest. In its discussion of when directors may consider stakeholders in
BCE, the Court noted that “conflicts may arise between the interests of stakeholders inter
se and between stakeholders and the corporation”.48 Professor Iacobucci has argued that
this cannot make sense: the ‘corporation’ is a legal construct and stakeholders feature in
its definition. A stakeholder can never be in conflict with the corporation; properly
48
BCE, supra 33 at para 81.
20
speaking, stakeholders can only be in conflict with each other.49 If we are to consider
future generations and the environment as stakeholders50, then we must have some way
of adjudicating between stakeholders. As Professor Iacobucci puts it, “for the fiduciary
duty to offer a meaningful guide to behaviour, it must offer some indication of what to do
in the presence of a true conflict.”51 Professor Iacobucci already laments how
indeterminate the Court rendered directors’ duties in BCE.52 Telling directors that they
simultaneously owe a fiduciary duty to the ‘corporation’ (all stakeholders) and toward the
environment (one stakeholder) would exacerbate the confusion and would make
corporate law matters even more difficult to adjudicate. Moreover, the duty would require
directors to serve two masters whose interests constantly conflict.
Third, even if we assume that well-financed, environmentally-minded, and
legally-activist shareholders exist in corporations, derivative actions will not successfully
enforce the duty. Professor Henderson herself notes Fischel and Bradley’s empirical
conclusion that “the very generality of fiduciary duties...limits their application to
relatively egregious cases.”53 The problems associated with enforcing the duty to
maximize shareholder profits persist in the environmental context. The confusion caused
with regards to its content and the confusion cause with regards to conflict of interests,
discussed above, will only serve to enhance the difficulties of enforcing the duty. If the
doctrine of shareholder primacy is difficult to enforce legally because it is difficult to
49
Iacobucci, supra note 39 at 236.
See generally Henderson, supra note 1.
51
Iacobucci, supra note 39 at 236.
52
Ibid at 237.
53
Daniel R Fischel & Michael Bradley, “The Role of Liability Rules and the Derivative
Suit in Corporate Law: A Theoretical and Empirical Analysis” 71 Cornell L Rev 261 at
283.
50
21
determine when the directors have inappropriately balanced long-term profit and shortterm profit; and if the ‘best interests of the corporation’ is difficult to determine because
of the competing interests that make up the ‘corporation’; then adding a fiduciary duty to
the environment will only serve to compound those difficulties. The result will be a duty
that not even a highly motivated, well-financed, environmentally-minded shareholder
could enforce.
Finally, Professor Henderson argues that environmentally-minded, activist
investors will monitor conduct. By this she does not mean that they will bring derivative
actions; rather, she hypothesizes that they will impose market pressures upon directors to
act in an environmentally responsible way.54 However, as Professor Richardson points
out, only two of the forty shareholder proposals filed in Canada in 2001 dealt with ethical
concerns, namely labor standards.55 While investor activism could be encouraged and
supported with some reform,56 activist investors cannot enforce a fiduciary duty to
minimize one’s impact on the environment on a systemic scale. Doing so would require
that environmentally minded investors take sufficient equity in every corporation that
may have negative impacts on the environment. First, the requisite investing power
would be astronomical. Second, private corporations would be immune from such
controls. Consider Glencore Xstrata plc, for example, a natural resources company
founded in 1974.57 Glencore International plc, a privately held corporation until 2011,
merged with Xstrata plc in 2012. Glencore was a big company: it had revenues of $70
54
Henderson, supra note 1 at 93-94.
Benjamin Richardson, “Financing Environmental Change: A New Role for Canadian
Environmental Law” (2004) 49:1 McGill LJ 145 at para 71.
56
See Richardson, supra note 55 at para 68-76.
57
Glencore Xstrata, History, online: Glencore Xstrata
<http://www.glencorexstrata.com/about-us/history/.
55
22
billion in the first half of 2010, prior to its IPO.58 An environmentally-activist pension
fund would not have been able to influence Glencore Xstrata’s corporate behavior prior
to 2011. Even now, any activist investor would need a lot of capital to influence the
company’s treatment of the environment.
2.2 Why a fiduciary duty is undesirable
Professor Henderson further argues that a fiduciary duty will improve corporate
environmental performance: 1) by instilling a norm of environmental protection among
directors; 2) by improving compliance with existing environmental regulation; and 3) by
integrating environmental factors into boards’ decision-making processes.59 I will now
address these benefits.
Professor Henderson argues that directors will internalize a norm to protect the
environment and that this norm will influence them to make more environmentallyfriendly decisions.60 She does so by drawing an analogy with the duty to maximize
shareholder profits: “the fact is that the existing corporate governance structure relies on
directors’ internalized senses of honour, responsibility and obligation to act in the
corporation’s best interests, given the weak sanctions for breach of their fiduciary
duty.”61 However, as demonstrated above, economic sanctions (otherwise termed ‘market
pressures’) do a lot of the work to enforce profit-maximization. Therefore, drawing an
Glencore International plc, Interim Report, “Release of Interim Report for 2011” (25
August 2011) online: HKEx News
<http://www.hkexnews.hk/listedco/listconews/sehk/2011/0825/LTN20110825243.pdf>
at 8.
59
Henderson, supra note 1 at 71.
60
Henderson, supra note 1 at 82-83.
61
Henderson, supra note 1 at 84.
58
23
analogy to profit-maximization is not sufficient to argue that directors will internalize a
fiduciary duty to minimize one’s impact on the environment.
Second, Professor Henderson argues that the duty will improve compliance with
existing regulations.62 She argues that directors view environmental regulations as a price
that should be incurred if the profits warrant it. However, it is not clear that directors’
duty of care cannot work to protect against such behavior. In BCE, the Supreme Court of
Canada held that directors’ duty of care63 “is not owed solely to the corporation, and may
thus be the basis for liability to other stakeholders in accordance with principles
governing the law of tort and extracontractual liability”.64 A duty to take reasonable care
involves instituting internal controls for environmental impact. Not only does that involve
complying with current laws to their fullest, but it also serves to establish environmental
protection in the minds of those who create business processes.
The same arguments apply for Professor Henderson’s third noted benefit: that a
fiduciary duty will better integrate the environment into corporate practice. Professor
Henderson makes two arguments. First, she argues that while voluntary standards could
have the effect of integrating environmental considerations into corporate practices, a
fiduciary duty will necessarily do that because it is mandatory.65 As argued above, the
duty to minimize one’s impact on the environment would be unenforceable in practice,
and the duty of care in section 122(1)(b) of the CBCA achieves the same (or a similar)
imperative. Second, she argues that a fiduciary duty will compel a director to inform
62
Henderson, supra note 1 at 87.
CBCA, supra note 31, s 122(1)(b).
64
BCE, supra note 33 at para 44.
65
Henderson, supra note 1 at 89.
63
24
herself of her corporation’s environmental impacts.66 Again, if the duty of care requires a
director to institute adequate due diligence controls, then it also necessarily requires her
to inform herself of her corporation’s environmental impacts. Additionally, a system of
environmental audits would contribute more to public knowledge about corporate
environmental impacts that would a fiduciary duty, as directors would not be required to
reveal that information.
Consequently, a fiduciary duty to minimize one’s impact on the environment is
not the best way to influence corporations to treat the environment better. First, the duty
will be difficult to enforce because its content is confusing, because it creates conflicts of
interest for directors, because it suffers from the same difficulties as the duty to maximize
shareholder profits, and because market forces will not compel its enforcement. Second,
even the purported benefits of the duty can be achieved using other means: either the duty
of care in section 122(1)(b) of the CBCA or through the system of environmental audits,
which I will describe now.
3. Why we should focus on environmental audits
I will now argue that a comprehensive system of environmental audits is a productive
way to advance the cause of environmental protection in corporate law. First I will argue
why social and moral sanctions are required to compel corporations to treat the
environment better. Second I will argue why environmental audits can effectively expose
corporate actors to social and moral sanctions.
66
Ibid.
25
3.1 Why social and moral sanctions are required
As discussed above, legal sanctions are not enough. In the profit-maximizing context,
economic sanctions must supplement legal sanctions in order to effectively enforce the
duty. If, with regards to the environment, we are having a difficult time a) enforcing legal
sanctions, and b) requiring corporations to internalize their environmental costs, then
investigating the possibility of supplementing legal sanctions with social and moral
sanctions is in order. I will argue that there is a lot of room for improvement in this
regard. The corporate structure insulates corporate and social actors from social and
moral sanctions. However, social and moral sanctions can be just as effective as hard law
in shaping corporate behavior. Exposing corporate actors to social and moral sanctions
will have two principal benefits: first, they will expose corporate behavior, thereby
increasing corporate actors’ accountability to society; second, they will create a large
body of environmental data that can be used to better enforce existing environmental
laws and understand environmental challenges.
First, the corporation insulates its actors from social and moral sanctions. One of
the great fears when corporate personality became entrenched into law was that the
corporation would become soulless. Professor Lawrence Friedman writes:
“The word “soulless” constantly recurs in the debates on
corporations. Everyone knew that corporations were really run
by human beings. Yet the metaphor was not entirely pointless.
Corporations did not die, and had no ultimate size. There were
no natural limits to their life or to their greed. Corporations, it
was feared, could concentrate the worst urges of whole groups
of men; the economic power of a corporation would not be
tempered by the mentality of any one man, or by
considerations of family or morality”.67
Lawrence Friedman, “A History of American Law” 2d ed (Simon & Schuster 1985) at
171-172.
67
26
What Professor Friedman means by ‘soulless’ is that each actors family and moral
considerations are divorced from their corporate considerations. Each corporate actor is
insulated in different ways.
For example, shareholders are insulated from corporate conduct in at least two
ways: lack of information and a collective action problem.68 First, shareholders suffer
from a lack of information about corporate operations. Consequently, shareholders do not
have “detailed and vivid” information about corporate activity.69 Adam Smith observes
that a person would not sleep all night if they lost their little finger; but upon learning
about an earthquake in China, would simply express sorrow and get on with their day.70
The division between owner-shareholders and managers means that shareholders “do not
participate in the sort of social and moral processes that give ordinary business owners
[sole proprietors] affirmative desires to behave in socially desirable ways when the law
68
See Elhauge, supra note 2 at 798-800.
Ibid at 798.
70
Adam Smith, Theory of Moral Sentiments (Oxford University Press, 1976) at III.iii.3.4:
“Let us suppose that the great empire of China, with all its myriads of inhabitants, was
suddenly swallowed up by an earthquake, and let us consider how a man of humanity in
Europe, who had no sort of connexion with that part of the world, would be affected upon
receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express
very strongly his sorrow for the misfortune of that unhappy people, he would make many
melancholy reflections upon the precariousness of human life, and the vanity of all the
labours of man, which could thus be annihilated in a moment. He would too, perhaps, if
he was a man of speculation, enter into many reasonings concerning the effects which
this disaster might produce upon the commerce of Europe, and the trade and business of
the world in general. And when all this fine philosophy was over, when all these humane
sentiments had been once fairly expressed, he would pursue his business or his pleasure,
take his repose or his diversion, with the same ease and tranquillity, as if no such accident
had happened. The most frivolous disaster which could befall himself would occasion a
more real disturbance. If he was to lose his little finger to-morrow, he would not sleep tonight; but, provided he never saw them, he will snore with the most profound security
over the ruin of a hundred millions of his brethren, and the destruction of that immense
multitude seems plainly an object less interesting to him, than this paltry misfortune of
his own.”
69
27
and profit motives are insufficient to do so.”71 Suppose that you own $500 worth of
shares in Timber Co. If allegations emerged in the newspapers that Timber Co was
engaging in excessive-but-legal clear cutting, you might shrug and move on with your
day since they are only allegations. Maybe you do not want to be associated with a firm
that even has allegations of environmental misconduct, so you sell your shares. But you
will never feel complicit in the environmental damage. It remains abstract to you. As
Elhauge puts it, a shareholder will feel morally divorced from “her corporation’s clear
cutting if she isn’t sure whether it is really doing it, how bad its environmental effects are,
or whether they are offset by favorable employment effects.”72 In other words, the
corporation is structured to morally isolate shareholders from the consequences of their
agents.
Shareholders also have a collective action problem. If, upon learning of
allegations of environmental misconduct at Timber Co, you decide to deploy your $500
stake to moral ends, you will run into an insurmountable obstacle: your say matters very
little. Given such low probability of impact, you would not have an incentive to read past
a newspaper article and check the facts of various reports against other sources of
information.73 Since institutional investors (as discussed above) cannot (or, more properly
speaking, do not) lend their considerable weight to solving these collective action
problems, shareholders still do not feel morally culpable for their corporation’s actions.
Corporate directors and managers, collectively known as ‘management’, are less
insulated from their actions; nonetheless, they should be even less so. Given that
71
Elhauge, supra note 2 at 798.
Ibid at 799.
73
Ibid at 800.
72
28
management is so close to the corporation’s processes and decisions, it feels more
connected to them. In other words, management does not suffer from informational bias74
or from the collective action problem faced by shareholders.75 But management is largely
insulated from outside sanctions. This is important because social and moral sanctions
only work when there is someone to sanction you or when you sanction yourself. So
either we must simply rely on the inherent goodness of people or we must expose those
people to the social and moral judgment of others. If we simply relied on the inherent
goodness of the people managing corporations, the corporate form would be a modern
manifestation of the Ring of Gyges.76 Indeed, the empirical evidence suggests that when
left unchecked, corporate management can do some pretty nasty things.77 One needs only
to think of the Enron scandal: Kenneth Lay is forever solidified in the corporate
imagination as someone very bad, indeed.78 Social and moral sanctions are therefore
necessary to moderate the behavior of corporate management.
One criticism might be that we cannot control the enforcement of social and
moral sanctions in the way that we can control the enforcement of hard law. However,
74
Ibid at 800.
Arguably, management suffers from an economic collective action problem. See the
above discussion about economic sanctions. If Timber Co does not engage certain
activity, then it will fall behind Lumber Co. In this sense, competitiveness could present a
collective action problem with regards to the environment.
76
See Plato, The Republic of Plato, translated by Allan Bloom (New York: Basic Books,
1991) at 359a–2.360d. Glaucon, one of Socrates’ interlocutors, presents the Myth of
Gyges, in which a shepherd finds a ring that conferred upon the him the power of
invisibility. Given “license to do whatever he wants,” (at 359c1-2) the shepherd commits
adultery with the king’s wife and kills the king. Glaucon’s point is that people will be
unjust given the opportunity to do so without being punished.
77
See also Ian B Lee, “Is There a Cure for Corporate ‘‘Psychopathy’’?” 42 Am Bus LJ
65.
78
Macey, supra note 9 at 79: “By now Enron has become a metaphor for corporate
failure.”
75
29
Professor Iacobucci surveys the literature on non-legal sanctions and notes that they “may
deter behavior just as, or more, effectively than formal legal sanctions”.79 For example,
social and moral sanctions likely explain why “there is widespread compliance with the
US tax laws even though odds that tax evasion will be detected and prosecuted are
extremely small”.80 And when, in 2012, reports of widespread aggressive tax planning
among multinational corporations became public, social and moral sanctions turned up in
full force. Several multinationals, including Apple and Google, were dragged in front of
US Congress and British Parliament to explain their actions.81 Other social and moral
sanctions include active negatives: “embarrassment of publicity, the reproach of family
and friends, the pain of enduring insults and protests, or being disdained or shunned by
acquaintances and strangers.”82 Recent history is rife with examples of the exercise of
social and moral sanctions.83 Social and moral sanctions may not be precise, but the
threat of them certainly has an impact.
Iacobucci, “On the Interaction between Legal and Reputational Sanctions” (2011)
[unpublished, archived at SSRN], referencing: Stewart Macaulay, “Non-Contractual
Relations in Business: A Preliminary Study” (1963) 28:1 American Sociological Review
55 and
Lisa Bernstein, “Opting Out of the Legal System: Extralegal Contractual Relations in the
Diamond Industry” (1992) 21 J Legal Stud 115. See also: Robert Cooter, “Three Effects
of Social Norms on Law: Expression, Deterrence, and Internalization” (2000b) 79:1
Oregon Law Review 1 and Melvin Eisenburg, “Corporate Law and Social Norms” (1999)
99:5 Columbia Law Review 1253.
80
Elhauge, supra note 2 at 753.
81
Schumpeter Blog, “Apple’s tax arrangements: Biting criticism” (21 May 2013), online:
The Economist <http://www.economist.com/blogs/schumpeter/2013/05/apples-taxarrangements>.
82
Elhauge, supra note 2 at 752
83
For example Graeme Wearden, “Oil spill: Protesters disrupt BP speech as Tony
Hayward pulls out” (22 June 2010), online: The Guardian
<http://www.theguardian.com/business/2010/jun/22/oil-spill-bp-hayward-cancelsspeech>:Tony Hayward (CEO of British Petroleum during the Deepwater Horizon crisis)
often endures protests in public. Another example is Dick Fuld (CEO of Lehman
79
30
3.2 Why environmental audits can expose corporate actors to social and moral
sanctions
Environmental audits can effectively expose corporate actors to social and moral
sanctions. The reason for focusing on environmental audits is not revolutionary. As early
as 1913, Justice Louis Brandeis advocated for transparency in the financial sector: the
way to deal with excessive bankers’ commissions was publicity, since “publicity is justly
commended as a remedy for social and industrial diseases.”84 The maxim that emerged
from Justice Brandeis’ piece is: sunlight is the best disinfectant.85 Transparency has
certainly become an immutable part of the financial sector.86 For example, corporate law
requires corporations to disclose certain information, to have their finances independently
audited;87 securities law requires financial market participants to disclose their dealings;88
and, increasingly, we create disclosure requirements for the environment.89 If
Brothers when it went bankrupt in 2008). See Joshua Green, “Where Is Dick Fuld Now?
Finding Lehman Brothers' Last CEO” (12 September 2013), online: Businessweek
<http://www.businessweek.com/articles/2013-09-12/where-is-dick-fuld-now-findinglehman-brothers-last-ceo>: “‘Hi, I’m Dick Fuld, the most hated man in America.’ It was
just after the crisis, and Fuld was making a rare social appearance at a party in the Sun
Valley, Idaho, mansion of Jim Johnson, the former head of Fannie Mae. The selfmocking introduction, described by a guest, was Fuld’s armor—his way of broaching,
and deflecting, the first thought that leaps to mind whenever someone hears his name:
Dick Fuld was the chief executive officer who, on Sept. 15, 2008, led Lehman Brothers
into the largest bankruptcy in U.S. history, setting a torch to the global financial system.”
84
Louis Brandeis, “Chapter V: What publicity can do” in On other people’s money
(Harper’s Weekly: 1913).
85
Ibid. Originally, the quote appears as: “Sunlight is said to be the best of disinfectants;
electric light the most efficient policeman”.
86
IOSCO, Objectives and Principles of Securities Regulation, (June, 2010) at 3.
87
CBCA, supra note 31, s 155(1)(a).
88
IOSCO, supra note 86 at 8.
89
See, for example, Continuous Disclosure Obligations, NI 51-102, (2004) 27 OSCB
3439.
31
environmental fraud is just as morally reprehensible as financial fraud, then we should
apply the same level of transparency to the former as we do to the latter.
Two benefits (in addition to exposure to social and moral sanctions) immediately
jump to mind: compliance and informational asymmetry. First, compliance: recall
Professor Henderson’s claim, discussed above, that a fiduciary duty would improve
compliance with the law because it will require a director to inform herself about her
corporation’s environmental impact. I argued that the duty of care in section 122(1)(b)
could do the same work. Once corporations (and, incidentally, also potential tort
plaintiffs) have access to an environmental auditors’ report, directors will be forced to
institute processes that adequately deal with most, if not all, environmental issues.
Otherwise, directors will violate the duty of care. Second, information: Professor
Henderson notes that “the information asymmetry between regulators and regulated
entities” one of the fundamental shortcomings of traditional forms of environmental
regulation.90 With a system of independent environmental audits, regulators (and,
incidentally, also the scientific community) will have a large amount of data being
produced every year. The quality of regulations and of scientific knowledge would be
greatly improved.
4. Conclusion
I have argued in this part that we should focus our energy on creating a system of
independent and public environmental audits. I started by arguing that the doctrine of
shareholder primacy is not robustly enforceable in reality. I extended that argument to
claim that a fiduciary duty to minimize one’s impact on the environment will suffer from
90
Henderson, supra note 1 at 73.
32
an equal, if not greater, unenforceability. I also presented additional reasons for which
such a fiduciary duty is undesirable. Instead, I suggested that we should be seeking
exposure to social and moral sanctions, and that a system of independent environmental
audits could achieve that objective.
PART II
In this Part II, I will propose a way to start thinking about environmental audits. I will
propose an analogy to financial audits. My goal is not to set forth a comprehensive
regime. Rather, I will introduce the idea that we should think of environmental
accountability in the same way as we think of financial accountability and discuss some
of the implications that arise from thinking of environmental audits in this way.
Consequently, I must proceed in two steps. In the first section, I will discuss the
myriad of assessments and legal mechanisms that exist to produce environmental
information. I will discuss four types of assessments or legal mechanisms that exist:
legislated disclosures, industry associations, ISO environmental standards, and
environmental consulting. While such an overview does not reflect all of the assessments
or mechanisms in use, they serve to illustrate the point that significant environmental
analysis ability exists in society.
In the second step, I will argue that a system that subjects most corporations to a
baseline audit and that standardizes a level of environmental transparency is preferable to
a hodgepodge of industry association requirements or voluntary adherence to ISO
standards. The analogy is to financial audits. Corporations should be just as accountable
for their environmental activity as they are for their financial activity. While we create
additional financial disclosures for corporations, we also subject all corporations to a
33
baseline level of transparency. We require independent parties to carry out this baseline
so that we can be sufficiently confident in the veracity of the results. We do this so that
we can be confident that corporate actors do not engage in fraud or some other
commercial shenanigans. The same should apply to environmental affairs: given the
alleged propensity of corporations to externalize their costs onto the environment, we
should require verification of their activities so that environmentally-minded social actors
(government agencies, academia, environmental watchdogs, environmentally-minded
investors) can be sufficiently informed about the true environmental impacts of
corporations. As with financial matters, the hope is that such sunlight will also disinfect
environmental misbehavior.
1. The current system
It would be very difficult to enumerate and discuss every way in which legal, economic,
or social pressures require the production of information about corporate environmental
impact. However, I do not need to give a comprehensive overview in order to achieve my
objectives. Instead, I only seek to establish that there are, in fact, a variety of ways in
which corporate environmental information is produced. From that conclusion, I hope to
further argue that a standardized system of public and independent audits would be a
desirable reform. Consequently, I will restrict my discussion to four topics: legislated
disclosures, industry associations, ISO environmental standards, and environmental
consulting. Additionally, I will limit my discussion to the Canadian context.
1.1 Legislated disclosures – securities regulation
An example of legislature-mandated disclosure of environmental information is in
Canadian securities law. National Instrument 51-102 sets out ongoing disclosure
34
requirements for companies that are reporting issuers – in other words, companies that
have participated in the public money markets.91 Companies are required to disclose
environmental information pursuant to their ongoing disclosure requirements in two
ways: through a filing of 1) an MD&A form; and 2) an AIF form.92 MD&A stands for
“Management Discussion & Analysis” and requires an issuer to report a narrative on its
performance. Specifically, the Canadian Securities Association interprets the obligation
as pertaining to the “extent [that] trends and uncertainties regarding environmental
matters materially impact its financial performance and future prospects.”93
Consequently, an MD&A filing should only discuss environment matters if they have an
impact on the issuing company’s financial performance.
AIF stands for “Annual Information Form” and requires issuers to report on the
material information relating to its business. Item 5 of the AIF form requires the issuer to
describe the business.94 In particular, Item 5.1(1)(k) requires an issuer to report what
impact the costs of environmental protection will have on its financial performance and
Item 5.1(2) requires reporting of environmental or social policies.95 Item 5.2 requires
issuers to disclose risk factors, including environmental or health risks.96 However, as
Form 51-102F2 makes clear, issuers should only report information that may have an
impact on financial performance: “If there is a risk that securityholders of your company
91
Continuous Disclosure Obligations, supra note 89, s 4.1.
Ibid, s 5.1 and 6.1
93
Canadian Securities Administrators, Notice 51-333 “Environmental Reporting
Guidance” (27 October 2010) at 11, interpreting Form 51-102F1, Item 1.4(g).
94
Form 51-102F2
95
Form 51-102F2, Item 5.1(1)(k) and 5.1(2).
96
Form 51-102F2, Item 5.2.
92
35
may become liable to make an additional contribution beyond the price of the security,
disclose that risk.”97
Crucially, issuers are only required to report on “material” matters. Issuers are
told to: “Focus your MD&A on material information. You do not need to disclose
information that is not material. Exercise your judgment when determining whether
information is material.”98 The test for materiality is objective and focuses on whether the
“a reasonable investor’s decision whether or not to buy, sell or hold securities of the
issuer would likely be influenced or changed if the information was omitted or
misstated.”99 Again, the focus of the disclosure rules is on the financial importance of
environmental impacts.
The focus of the rules is insufficient because it frames what information is
included or excluded in disclosures along lines of financial impact. Assume that Timber
Co is listed on the TSX and therefore subject to NI 51-102. Assume also that Timber Co
causes significant environmental damage that does not run afoul of any environmental
protection legislation or other type of liability. In other words, the company can
externalize their cost without financial consequences due to, for example, a lawsuit.
Timber Co’s directors would not be required to report this environmental impact under
NI 51-102.
Mandatory disclosure is also insufficient because there is no verification.
Directors are told to use their judgment. Not only are we not assured that directors have
97
Form 51-102F2, Item 5.2
Form 51-102F1, Part 1(e); Form 51-102F2, Part 1(d).
99
CSA, supra note 93 at 5.
98
36
told us everything they are supposed to tell us, we are also not assured that what they are
properly characterizing their disclosure.
1.2 Industry associations and voluntary disclosure
Industry associations and voluntary disclosure are also a significant source of information
about corporate environmental impact. I will discuss the Chemistry Industry Association
of Canada (CIAC) and its Responsible Care program, in particular, to illustrate how
industry associations can produce environmental information and encourage compliance.
With regards to other types of voluntary disclosure, I will point to Ceres’ Global
Reporting Initiative and its reporting standards.
CIAC is an association of chemical manufacturers in Canada that have decided to
set standards of environmental conduct and adhere to them.100 They call these standards
“Responsible Care®” (Responsible Care).101 Borrowing from Lord Chief Justice
Hewart’s dictum in R v Sussex Justices, ex parte McCarthy102, the Responsible Care
motto is “Do the right thing, and be seen to do the right thing.”103 What is the right
thing? CIAC has developed three Responsible Care Codes to which member companies
must adhere: an Operations Code, a Stewardship Code, and an Accountability Code.104
The Operations Code sets standards for facilities and equipment.105 The Stewardship
100
Chemical Industry Association of Canada, Members and Partners, online: CIAC
<http://canadianchemistry.nmd.cc/index.php/en/members-partners>.
101
Chemical Industry Association of Canada, Responsible Care, online: CIAC
<http://canadianchemistry.nmd.cc/responsible_care/index.php/en/index>.
102
R v Sussex Justices, ex parte McCarthy [1924] 1 KB 256, [1923] All ER Rep 233.
103
Chemical Industry Association of Canada, Our Commitment, online: CIAC
<http://canadianchemistry.nmd.cc/responsible_care/index.php/en/our-commitment>.
104
Chemical Industry Association of Canada, Responsible Care Codes, online: CIAC
<http://canadianchemistry.nmd.cc/responsible_care/index.php/en/responsible-carecodes>.
105
Ibid.
37
Code sets standards for the impact and safety of CIAC members’ products throughout
their entire life cycle.106 The Accountability Code requires member companies to
communicate the risks and benefits of their operations to the communities in which they
operate.107
In order to ensure compliance, CIAC requires members to undergo verification.
The verification process is robust:
“Every three years, a team of industry experts, public advocates and
representatives chosen by local communities, visits each CIAC
member- and partner-company and interviews its senior managers. The
verification team looks for answers to three key questions:
.
.
.
Is the company meeting the expectations outlined in the
Responsible Care® Codes?
Is an effective management system in place that supports
Responsible Care, and drives continuous improvement, in all
areas?
Is the company’s commitment to the Responsible Care® Ethic
and Principles for Sustainability tangible, and does it guide the
company’s judgment, decisions and actions, internally and
externally?”108
The resulting verification reports are posted on the Responsible Care website and are
available for anyone to consult.109 Consequently, CIAC imposes upon its members not
only standards of conduct, but also a public and independent verification process to
ensure that its members comply with those standards.
106
Ibid.
Ibid.
108
Chemical Industry Association of Canada, Responsible Care Verification, online:
CIAC <http://canadianchemistry.nmd.cc/responsible_care/index.php/en/responsible-careverification>.
109
Chemical Industry Association of Canada, Responsible Care Verification Reports,
online: CIAC
<http://canadianchemistry.nmd.cc/responsible_care/index.php/en/responsible-careverification-reports>.
107
38
The Global Reporting Initiative (GRI), on the other hand, is international and
spans across industries. The GRI is an organization that promotes the use of
“sustainability reporting as a way for companies to become more sustainable and
contribute to sustainable development.”110 Sustainability reports focus on the
environmental, economic and social impacts of a business in their operations. To guide
reporting, the GRI has therefore come up with reporting standards. The current iteration
of those standards is “4G”, to indicate that the standards are in their fourth generation.
Environmental reporting includes extensive reporting of the company’s impact on:
materials, energy, water, biodiversity, and effluents and waste.111 The GRI thus provides
a comprehensive framework to assess a company’s environmental impacts.
The Responsible Care program and the Global reporting initiative are good
example of the effect that transparency can have on corporate environmental
performance. The CIAC example is particular because its members have set standards of
conduct that will be verified. What I want to draw from the example is that verification
systems exist for environmental performance.
1.3 ISO environmental standards
The International Organization for Standardization (ISO) is a network of national
standards bodies that develops international standards for good practice, products,
technologies, and services.112 Each standard is a document that provides “requirements,
specifications, guidelines or characteristics that can be used consistently to ensure that
110
Global Reporting Initiative, About GRI, online: GRO
<https://www.globalreporting.org/information/about-gri/Pages/default.aspx>.
111
Global Reporting Intiaitive, Reporting Standards and Disclosures, online: GRI
<https://www.globalreporting.org/reporting/g4/Pages/default.aspx> at 9.
112
International Organization for Standardization, Home, online: ISO
<http://www.iso.org/iso/home/about.htm>.
39
materials, products, processes and services are fit for their purpose.”113 A salient example
of an ISO standard is with regards to water. ISO committee ISO/TC 224 is “working on
best-practice guidelines specifically for the management of assets within the municipal
water sector.”114
The ISO 14000 family addresses environmental management.115 Specific
standards within the family may address environmental systems management, product
lifecycles, and, most importantly, audits.116 ISO thus contributes to a knowledge base
about what information is relevant in conducting environmental audits.
1.4 Environmental consulting
Environmental consulting also contributes to our collective knowledge about how to
think of corporations’ environmental impacts. For example, we have general consulting
firms like KPMG or McKinsey, and specific environmental consulting firms like Eco
Canada.
General consulting firms like KPMG and McKinsey offer environmental
consulting services. McKinsey advertises that it has recently worked to make land use
and ocean fisheries sustainable. Specifically, it mentions: “Recent examples of our work
include helping a global fertilizer company design a climate-compatible growth strategy;
working with a national government to launch an international partnership to reduce
greenhouse gas emissions through forestry initiatives; and helping a pulp and paper
113
International Organization for Standardization, Standards, online: ISO
<http://www.iso.org/iso/home/standards.htm>.
114
International Organization for Standardization, Managing water assets - Tackling the
infrastructure gap, online: ISO
<http://www.iso.org/iso/home/news_index/news_archive/news.htm?Refid=Ref1762>.
115
International Organization for Standardization, ISO 14000, online: ISO
<http://www.iso.org/iso/home/standards/management-standards/iso14000.htm>.
116
Ibid.
40
company analyze its supply chain to reduce fiber sourcing costs and increase
sustainability.”117 Similar firms such as KPMG offer similar services. KPMG has an
entire sustainability practice that seeks to help companies “enhance processes, grow
revenue, manage risk, strengthen reporting, optimize costs, and spur innovation.”118
Notwithstanding any corporate buzzwords and green-washing of studies that may exist,
these practices reveal two important facts: 1) that corporate services provides are using
language of sustainability; and 2) that they are engaging with environmental questions
and situations. Consequently, there exists within the general consulting firms at least
some useful and important knowledge about how to assess the environmental impacts of
corporations.
Environmental consulting firms, like Eco Canada, help professionalize the
knowledge that I discussed above. Eco Canada provides certifications for environmental
auditing, among other environmental functions.119 Aspiring environmental auditors come
in two brands: Compliance Auditors and Environmental Management Systems Lead
Auditor. The latter is further divided into two specializations: Environmental
Management Systems and Sustainable Forestry Management. Certified auditors are
trained to use ISO standards, among others.120
117
McKinsey & Company, Sustainability & Resource Productivity, online: McKinsey
<http://www.mckinsey.com/client_service/sustainability/expertise/biosystems>.
118
KPMG International, Climate Change and Sustainability Services, online: KPMG
<http://www.kpmg.com/global/en/topics/climate-change-sustainabilityservices/pages/default.aspx?utm_medium=mdd&utm_campaign=mddglobal&utm_source=link>.
119
Eco Canada, Environmental Auditor, online: Eco Canada
<http://www.eco.ca/certification/environmental-auditor/>.
120
Ibid.
41
1.5 Bringing the current system together
The point of the above discussion is to demonstrate that we have significant
abilities to evaluate corporate environmental impact. However, each is not sufficient by
itself. For example, mandatory disclosures in securities regulation do not produce the
right type of information because disclosures focus on financial impact and because they
are not verified. Industry associations like CIAC that produce independent and public
audits are desirable, but they are not comprehensive: not every industry has an
association, and not all members are or seek to be part of their industry association. Other
mechanisms like GRI and ISO standards are equally desirable but require the voluntary
compliance of companies. I think that we could, and should, pull these environmental
evaluation capabilities together into one standardized public and independent audit. This
will be the subject of the next section.
2. Reform: an analogy with financial audits
2.1 Why an analogy to financial audits?
I am proposing that the law should apply the same level of scrutiny to a corporation’s
environmental performance as it does to a corporation’s financial performance. In other
words, we should starting thinking of environmental audits in the same way as we think
of financial audits. I discussed some reasons for this in Part I, particularly in reference to
how environmental audits can expose corporate actors to social and moral sanctions. But
this argument can go even a step further: it would be legally incoherent not to require
corporations to undergo environmental audits.
We require financial audits in corporate law, and financial disclosure in securities
law, to protect investors. Think of Louis Brandeis’ argument that “sunlight is the best of
42
disinfectants.”121 Corporations use other people’s money and we need to ensure that they
do not misuse that money. Indeed, the business judgment rule cases above reveal the
same concern: we do not want corporate actors to use their corporate control to benefit
themselves financially, like in Dodge. Instead, all we ask is that corporate actors be
personally disinterested in the decision, be informed about the decision, and have some
reason to believe that the decision is in the best interests of the corporation. Financial
disclosure aids compliance with the business judgment rule. In other words, we require
financial audits to prevent fraud.
Another way of looking at fraud is as a cost of doing business. Assuming that they
could do so with impunity, corporate actors would have an incentive to defraud the
corporation. All other things (legal, economic, social and moral sanctions) being equal,
fraud means cash in corporate directors’ and officers’ pockets. But we both think of that
as theft, and do not think that corporate directors and managers should personally benefit
from their positions beyond remuneration. Consequently, we institute a compliance
mechanism, “the audit,” to ensure that corporate directors and managers are not stealing
from their shareholders.
Another way of looking at corporate mistreatment of the environment is as a cost
of doing business. It is commonly accepted that companies have a tendency to
‘externalize their environmental costs’ onto other actors in society.122 All other things
equal, a factory would have an incentive to dump its waste into a river. Simply put, it
would be a cost of cleanup not incurred. The law provides for various mechanisms to
pursue the factory in that case, including environmental legislation or the tort of nuisance.
121
122
See supra, at Part I, section 3.2.
See, for example, Henderson, supra note 1 at 70, 78-79.
43
I do not mean to go so far as claim that corporations are defrauding society when
externalizing their environmental costs. But as a matter of policy, it is incoherent to
require compliance for financial honesty and not for environmental matters.
The incoherence becomes apparent when we think of the environment as capital.
E.F. Schumacher writes:
“The illusion of unlimited powers, nourished by astonishing scientific
and technological achievements, has produced the concurrent illusion of
having solved the problem of production. The latter illusion is based on
the failure to distinguish between income and capital where this
distinction matters most. Every economist and businessman is familiar
with the distinction, and applies it conscientiously and with
considerable subtlety to all economic affairs – except where it really
matters: namely, the irreplaceable capital which man has not made, but
simply found, and without which he can do nothing.”123
If the environment is society’s capital and money is an investor’s capital, then
why should we not apply the same scrutiny to the use or misuse of one as we do
to the other? We would argue that a corporate director or manager squandering
the capital of a corporation without accountability to the investor is unlawful.
How then can we allow a corporation to squander the capital of society without
being accountable to it? The result is that we must apply the thinking on investor
money to the environment and require corporations to disclose environmental
information in an analogous same way to the disclosure financial information. In
other words, we should think of environment audits as equally important as
financial audits.
123
EF Schumacher, Small Is Beautiful: Economics as if People Mattered (London, Blond
& Briggs Ltd, 1973) at 14.
44
2.2 The five questions: Who? What? When? Where? How?
Having answered the question, “why environmental audits,” five questions remain to
illustrate what type of reform I am proposing. First: who should conduct the audits? In
keeping with a financial audit analogy, professionally accredited environmental auditors
should conduct these audits. A professional association would need to be created. The
first objection could be that we do not have enough consensus to develop proper
professional standards. However, the above discussion about the current system reveals
that sufficient knowledge exists about how to assess environmental standards.
Organizations like Eco Canada already accredit environmental auditors. Just as the
professional best practices of accountants and lawyers evolve, so will the best practices of
environmental auditors. The current problem is a market one: environmental auditors do
not have a big enough market. Accountants and lawyers both have the monopoly over
their respective work, and work is always assured. Companies need financial audits and
legal advice. If companies would be compelled to produce environmental audits, demand
for environmental auditors would increase and remain constant to the point that a robust
professional association would be able to develop.
A second objection could be that different industries have different needs. This
may be true, but that does not mean that we should abandon a project of setting a baseline
standard for environmental auditing. Perhaps the best example would be to compare
environmental auditing to the legal profession. There are many different types of legal
services: criminal, civil litigation, tax advice, securities regulation, etc. And while in
reality lawyers often specialize in one over the other, all lawyers are members of the
same bar. Similarly, while the specific requirements of Timber Co versus a CIAC
45
member versus an oil refiner might be different, we can still subject each to the same
standard of auditing.
Second: of what should the audits consist? As discussed above, there currently
exist many standards from which to draw. ISO, GRI, and Responsible Care would be a
good place to start. But lawyers ultimately lack the institutional expertise to make these
arguments. This should be left to the professional association and scientific discourse.
More scientific information is therefore also needed before we can answer the
third question: how often should audits occur? One answer could be that environmental
audits should be produced every three years, like CIAC audits. However, this question
should therefore also be left to the professional association and scientific consensus.
Fourth: how should this reform be implemented into the law? This is the work of
lawyers. The most logical solution is to place the reform somewhere in the existing
financial audit framework. Directors are required to submit comparative financial
statements to shareholders pursuant to section 155(1)(a) of the CBCA.124 Section
155(1)(b) states that directors may choose to submit an auditor’s report.125 In the case of
large corporations directors will often do so because they have a statutory duty to approve
financial statements pursuant to section 158.126 Auditor reports help directors to discharge
their duty of diligence in accordance with their statutory duties. Environmental audits
would logically fit well in this part of the legislation.
There should also be exceptions. In recognition of the burden that audits place on
corporate resources, section 163(1) permits corporations that are not “distributing
124
CBCA, supra note 31, s 155(1)(a).
CBCA, ibid, s 155(1)(b).
126
CBCA, ibid, s 158.
125
46
corporations” to dispense with an auditor.127 The CBCA Regulations define “distributing
corporation” as a “reporting issuer” under any legislation, a corporation that has filed a
prospectus or registration statement pursuant to provincial legislation, a corporation that
has listed securities on any exchange, or one that is sufficiently connected to one of the
aforementioned corporations.128 The ‘not a distributing corporation’ exception has the
effect of exempting ‘mom and pop stores’ from the burdens of a full-scale audit.
Similarly, a reform could require companies to present an environmental auditor’s report
alongside that of a financial auditor. The same exceptions could easily apply in the
environmental context. We are concerned with the environmental footprint of Timber Co,
the chemicals manufacturer, and the oil refiner, not of the dépanneur down the street.
Fifth, and finally: where should the audits be available? As discussed above,
environmental audits should be public in order to achieve the objective of exposing
corporate actors to social and moral sanctions. Additionally, audits must be public in
order to gain the benefits of increased scientific understanding gained from having
systematically collected environmental information available. Some wretched and
unfortunate research assistant cannot tabulate the results of the environmental audits into
his or her professor’s environmental model unless those audits are available. Nor can the
watchdog agencies call out bad behavior unless the audits are public. One solution would
be to require companies to make the audit reports public on their websites. This is the
way they make annual reports public. However, the better solution would be to aggregate
the reports in some audit repository on Environment Canada’s website. Placing all of the
audit reports in one place dispenses with the need to collect reports from each individual
127
128
CBCA, ibid, s 163(1).
Canada Business Corporations Regulations, SOR/2001-512, s 2(1) [CBCA Regs].
47
company’s website, a process that would almost certainly result in some companies being
overlooked. Given the stated objectives for the reform, locating all of the audit reports in
one location is the preferred choice.
3. Further considerations
Some further considerations are of a scientific nature and have already been flagged:
What should be the standards for admission to the professional environmental auditing
association? What should be the content on the audits? How often should audits occur?
Some other questions arise of a legal nature. For example, I have suggested that a new
professional association would be created. Should we be concerned about the possibility
of the accounting profession controlling this new profession, or would that give it the
legitimacy it needs? Perhaps it would be better to subsume environmental auditors within
the accounting profession altogether. Will the knowledge required of accountants become
unwieldy?
Similarly, I have suggested a way to implement this reform into the law. I have
proposed to simply create an environmental auditing obligation similar to the financial
auditing obligation and borrowed an exception that the financial audit rules afford to
smaller companies. Perhaps we should consider other exceptions or methods of
enforcement.
Finally, we should consider the ways in which such a reform could benefit
corporations. One argument could be that environmental audits will increase social
confidence in the corporate form. In other words, environmental audits will increase a
corporation’s ‘social license to operate’. This benefit, and other benefits, should be
considered in future papers.
48
CONCLUSION
In this paper, I have argued that a system of independent and public
environmental audits of corporations is desirable. In the first part, I argued that creating a
legal duty to minimize one’s impact on the environment is neither enforceable nor
desirable. To prove that statement, I demonstrated that the traditional doctrine of
shareholder primacy with its duty to maximize profits was not enforceable due to the
business judgment rule. Any duty to minimize one’s impact on the environment would
have to incorporate a rule that offers some similar deference to corporate decisions.
Additionally, legislation and case law in Canada has already given directors of Canadian
corporations large discretion to consider stakeholders, including the environment.
Consequently, we should not be looking to pressure directors with legal sanctions.
Instead, I argued, we should be pressing directors on social and moral sanctions. I argued
that the structure of information and incentives in the corporate largely insulates
corporate management from the effects of their decisions. If we want corporations to treat
the environment better, then we should expose the people who run them to social and
moral sanctions. I have proposed that the way to do that is through a system of
independent and public environmental audits.
In the second part, I argued that society’s collective environmental analysis
capabilities are extensive enough to develop the infrastructure needed to create such a
system. I do not suggest that this should be a cumbersome state program. Rather, by
simply creating the obligation (with a few exceptions) to produce environmental audits,
the private market will develop its own environmental auditing industry analogous to the
49
financial auditing industry. My hope has been to contribute to the ways of thinking about
corporate accountability and the environment.
50
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