Diversity, ESG, and Latent Board Power

Abstract

Corporations have traditionally treated shareholder wealth as primary. In recent years, however, cracks in this hierarchy have appeared. An enlargement of purpose is now visible across corporate governance, from the new emphasis on board diversity to the surge in environmental, social, and governance ("ESG") investing, to the growing success of benefit corporations. But in legal terms, corporate policy change requires more—specifically, the approval and participation of the board of directors.

The vast normative and empirical literature on diversity, ESG, and the stakeholder theory of the firm overlooks some key operational questions and tensions, which this Article frames and develops for the first time. How might differently-constituted boards of directors approach tradeoffs between shareholder wealth and social welfare differently? What levers can they reach for to broker competing claims to priority? What constrains them?

Exploring the rising pluralism of corporate purpose through this lens—legally, the one that matters most—suggests the board's powers are far more capacious than is commonly appreciated. As the board's make-up, mission, and voting base broaden, its historical norm of deferring to CEOs may prove unstable. This Article provides a novel account of how boards might recover their latent powers and promote diversity and ESG in corporate law.

Keywords: diversity, corporate governance, ESG, stakeholder, firm, environmental, social, governance, CSR, corporate social responsibility, independent director, independent board of directors, business judgment rule, benefit corporation, Delaware, public companies

JEL Classification: K22, D02, D21, D23, D24, D63, M14