What are the fiduciary responsibilities of a company’s board to its shareholders? In the UK, they often overlap with obligations under common law, but they also encompass provisions set out in the Companies Act 2006, arguably the first legislation in the UK to specifically codify the role of directors outside the realm of common law.
The given circumstances and extent to which a director might exercise their statutory duties are also covered in a company’s Articles of Association, so board members should be in no doubt as to their obligations and the scope of their powers.
But it was long thought that legislation encompassing shareholder primacy and stakeholder theories was imprecise, so concepts falling under ‘enlightened shareholder value’ were introduced. They were essentially progenitors of the environmental, social and governance (ESG) principles which increasingly inform the corporate decision-making process.
Few retail shareholders would dismiss the stakeholder principle outright, nor the notion that environmental stewardship should be a key consideration for directors. The trouble is this enlightened outlook seems to have stretched to areas of public policy which have no obvious relevance to the way in which a given company is run. Shareholders would be rightly aggrieved if they thought that board members were tailoring company policy based on social issues beyond the board's purview, particularly if it can be shown that said decisions had destroyed shareholder value.
By now, everyone is probably aware of the kafuffle that has ensued since Disney (US:DIS) decided to take a stand against Florida’s Parental Rights in Education Act – legislation designed to stop schoolteachers from discussing sexuality and gender-identity with young kids. State governor Ron DeSantis was immediately targeted by lobby groups for backing the legislation, including activists within Disney. Although initially reluctant to take a stance, Disney’s chief executive, Ron Chapek, eventually caved in to pressure and backed a campaign designed to repeal the bill through the legislature, or see it struck down in the courts.
The controversy escalated to the point where DeSantis introduced another bill which stripped Disney World’s ‘special district’ status in Florida and the tax breaks that come with it. Disney operates a virtual fiefdom in the ‘Sunshine State’, enabling it to control its own infrastructure, emergency services and building codes without governmental oversight. A sweetheart deal if there ever was one, although it’s thought that Florida taxpayers could be on the hook for nearly $1bn (£0.77bn) in bond debt if the company is forced to give up its perks.
Such a scenario may or may not play out, with the enrichment of the legal fraternity the only sure outcome. The point is, however, that social activism on this basis – a spat over what children should be exposed to at a young age – is surely beyond the scope of Disney executives' responsibilities.
Anyone invested in the entertainment group would be justified in wondering whether the board's stance will alienate Disney's target demographic – or at least their parents – with all the potential negative implications for financial performance and the share price (down 19 per cent over the past month).
It comes as state and municipal officials in the US are taking a harder line on the use of the stakeholder principles to drive through what some would describe as purely ideological positions. This extends to the revocation of proxy voting authority in some instances.
Institutional investors rely heavily on proxy advisory firms to manage their proxy voting. Analysis from the Harvard Law School Forum on Corporate Governance suggests that “voting recommendations are subject to capture by voters with strong preferences for social concerns outside shareholder wealth maximisation”, with the logical corollary that “proxy advisors’ shifts in voting recommendations are associated with stock-price drops”.
In 2020, BlackRock’s (US:BLK) co-founder and chief executive, Larry Fink, revealed that the investment powerhouse – Disney's largest shareholder – would be allocating capital with specific reference to the ESG criteria laid out by the Sustainability Accounting Standards Board. It created quite a stir at the time, not surprising given his organisation’s financial clout, although attention was largely focused on its investment policy towards the fossil fuel industry.
Yet, Fink’s latest annual letter to chief executives appears more conciliatory in nature, perhaps mindful of rising opposition to what some might consider policy overreach, noting that “stakeholder capitalism is not about politics. It is not a social or ideological agenda”. He might do well to remind the Disney board on this point lest pension fund managers and retail investors vote with their feet.
