In this episode, Terry Johnson, an attorney who advises management and board members of both private and public companies, talks about what clients are facing regarding ESG risk identification and management, and how boards are responding to the growing push back against mandated board diversity and stakeholder capitalism.

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Terry Johnson Bio

Terry is a corporate and securities partner at the law firm of Arnold & Porter.  She acts as a trusted advisor to the C suite, boards of directors and board members. In her corporate governance work, she advises both public and private company boards and management on board diversity and stakeholder capitalism. Among other areas, her practice often involves counseling management and boards about ESG risk management, including disclosure and liability issues.  She often speaks and writes about corporate governance and in particular, board diversity, including the California board diversity legislation and NASDAQ’s listing rules, and she has authored articles in the Financial Times regarding the effectiveness of quotas in achieving board diversity and the treatment of climate change as a systematic risk to global finance. Terry’s experience also includes representing wineries and winery owners, and family-owned companies in a variety of industries.

She has been recognized by the Daily Journal as one of the Top 100 Women Lawyers in California and has been included in Best Lawyers in America since 2014.  In 2022 Terry was selected by the San Francisco Business Times as one of the 13 OUTstanding Voices paving the way for LGBTQ equality in the workplace in its annual Business of Pride awards.  Terry is currently the Treasurer of the Bar Association of San Francisco, in line to assume the presidency in 2024.

Links

Caught in the Culture Wars Crossfire: Board Diversity Initiatives Under Attack

SEC Approves Nasdaq Diversity Proposal

Public shaming will not solve the lack of diversity on corporate boards

Treat Climate Change as a Systemic Risk to Global Finance 

Quotes

Board Diversity

We are now starting to see a pushback on ESG generally and board diversity in particular as witnessed by the challenges to the California legislation regarding board diversity.  Conservative groups are also bringing claims in the Fifth Circuit in Texas against NASDAQ’s board diversity listing rule.

The NASDAQ rule is not mandatory, it’s not a quota, it’s a comply or disclose and explain why. Essentially, you’re not required to put more diverse directors on the board, you just have to tell people why you haven’t, but in today’s world, knowing that there would be a strong disincentive to having to explain why you couldn’t find a qualified woman for your board or you couldn’t find a qualified member of an underrepresented group.

The investment community has been the loudest voice in support of board diversity, but we’re certainly starting to hear other voices that are pushing back and saying, “No, we think you ought to be simply deciding board members based on the way we’ve always done it.”

Diversity quotas are a “rough justice” approach in that it requires you to put different people on boards – but it does work. 

The argument against mandated board diversity is that that instead of making a decision about a board member based on pure merit, it’s made on another basis: “We don’t want to be required to pick a director who happens to be a woman or director who happens to be part of a member of an underrepresented community, we want to pick the best director whoever that is.”

Big Ideas/Thoughts

ESG risk management

The ESG realm is huge, I mean, just climate change alone under the E part of it, is an enormous topic in itself, and then S and G, the social and governance aspects of it are related, but completely separate sets of issues and concerns to think through.

Wildfires are a huge concern here in California, which is where I’m based, and a good example of ESG risk management.  I’m talking to clients about in various respects about how to think about potential liability, how they could be affected by wildfires. If they are involved in a business that puts them at risk for liability related to wildfires, how to consider that – that’s just one example of things that I’m starting to see come across my desk.

One of the things that is challenging to navigate the ESG waters, especially for public companies, is that you have to figure out how to say things because you want to let the market know about your commitment, but at the same time, not set yourself up for liability, and that’s a huge challenge.  For example, what it means is reading your ESG report side by side with the 10-Ks and 10-Qs and other periodic reports you’ve put out under your 34 Act reporting and making sure that at the bottom line, you don’t have inconsistencies.

You have to be clear with the market and with all of your stakeholders, which would include not only your shareholders, but your employees and your suppliers and the communities in which you do business and so forth about exactly what you’re going to do and to be careful about not making statements that could be called greenwashing, not overstating what you’re going to do.

Stakeholder Capitalism

 I think that the Business Roundtable’s statement in August of 2019 really had an enormous impact on changing the conversation about stakeholder capitalism. It put that on the front page of every business newspaper, and it brought it to the forefront in a way that I don’t know that any other kind of initiative could have done.  

You have buy-in from companies that are the leading corporate lights, companies that are solidly in the mainstream, the biggest financial institutions, for example. I think that’s really a good thing.

Q: When you advise your clients about stakeholder capitalism, what do you advise them to do in order to be able to manage this issue? 

I draw their attention back to their fiduciary duties because the bottom line is, as a director, you have fiduciary duties, and that’s what governs your job, that’s your north star in fulfilling your duties as a member of the board…you have a fiduciary duty to your stockholders. 

Regarding short-term and long-term goals and how you look at it in advising directors, I would say, “Well, your fiduciary duty is to your shareholders. You don’t have a technical fiduciary duty to your stakeholders, but it’s a question of looking at the long term and looking down the road. 

Do you see that in order to operate your business in the longer term, you’re going to need to start planning for the effects of climate change? You’re going to need to start pivoting away from a particular business because it has such a high carbon impact, or maybe you want to invest in something that is a carbon capture technology?” It all comes back to your shareholders – from a legal standpoint, that’s still the guiding light.

Episode Transcript

Joe: [00:00:00] Hello, and welcome to On Boards, a deep dive at what drives business success. I’m Joe Ayoub, and I’m here with my co-host, Raza Shaikh. On Boards is about boards of directors and advisors and all aspects of governance. Twice a month this is the place to learn about one of the most critically important aspects of any company or organization: its board of directors or advisors as -well as the important issues that are facing boards, company leadership, and stakeholders.

Raza: Joe and I speak with a wide range of guests and talk about what makes a board successful or unsuccessful, what it takes to be an effective board member, what challenges boards are facing and how they’re assessing those challenges and how to make your board one of the most valuable assets of your organization.

Joe: Our guest today is Terry Johnson. Terry is a a corporate and securities partner at the law firm of Arnold & Porter. She acts as a trusted advisor to the C-suite, boards of [00:01:00] directors and board members. She advises both public and private company boards and management on board diversity and stakeholder capitalism, and her practice often involves counseling management and boards about ESG risk management, including disclosure and liability issues.

Raza: Terry speaks and writes about corporate governance and, in particular, board diversity, including the California board diversity legislation and the NASDAQ’s listing rules, and she has authored articles in the Financial Times regarding the effectiveness of quotas in achieving board diversity and the treatment of climate change as a systemic risk to global finance.

Joe: Terry has been recognized by the Daily Journal as one of the top 100 women lawyers in California and has been included in Best Lawyers in America since 2014. Terry, it’s great to have you with us on On Boards today.

Terry: Great. Thank you, Joe. Thank you, Raza. It’s great to be [00:02:00] here. 

Joe: You have been working with clients on a lot of issues that we’ve been talking about on this podcast. Could you start off by just telling us a little bit about your practice and your work advising companies and boards.

Terry: Sure. The work I do is primarily, as you noted, as a trusted advisor to members of boards, sometimes to board committees or to the full board, also to members of management in the C-suite and elsewhere in working through corporate governance issues and, of late, that has focused significantly on ESG and stakeholder capitalism, and then within that, board diversity has been a big piece of it. To kind of give a little bit of a flavor of some of the things that we’ve been working on, for example, here in California, which is where I’m based, wildfires are a huge concern, and one of the things that I’m finding myself talking to clients about in various respects is how to [00:03:00] think about potential liability, how they could be affected by wildfires. If they are involved in a business that puts them in potentially at risk for liability related to wildfires, how to consider that, so that’s just one example of the many kinds of things that I’m starting to see come across my desk. 

Joe: Yeah, I think it’s a great example because sometimes when you say ESG, it’s such a big category that not everyone kind of connects the dots to who they are, where their company is and how it might affect them. I think the wildfire topic, especially where you are and where some of your clients would be, and I know you represent wineries among other things, I think wildfires might be an important aspect for wineries to be considering given what’s going on out there.

Terry: Oh, absolutely. There have been a number of concerns in the past couple of years where we had significant fires here in the wine-growing regions in Napa and Sonoma. A number of wineries, for example, had to essentially give up [00:04:00] all or a portion of their crops because of a smoke taint, and so that meant that they were not able to produce wine in those years or had to produce a lot less wine. There was a complicated set of insurance claims. The insurance process here in California has become much more difficult and much more complicated.

 There’s a ton of concerns in that space alone and that’s just one example. I mean, as you say, Joe, that the ESG realm is so large, I mean, just the climate change alone is under the E part of it, it is sort of an enormous topic in itself, and then S and G, the social and governance aspects of it too, are related, but completely separate sets of issues and concerns to think through. 

Joe: Let’s talk about one of the things that you advise boards and companies about, which is board diversity. We talk here a lot about the importance of diversity, big diversity, which means diversity of perspective and background and skills, experience, attributes. It covers a [00:05:00] lot of ground. One of the things we talked about when we met with you last week was the fact that there is a growing pushback on diversity in a number of areas. Can you talk about some of the statutory pushback that you’ve seen and what’s been going on with that?

Terry: In California we have two laws currently on the books. One was adopted in 2018 known generally as SBA 26, which is it’s named in the Legislature, and that requires that there be a minimum number of women on the boards of public companies that are headquartered in California.

There’s also another law that was adopted in 2020, called AB 979, which mandates a minimum number of members of underrepresented communities which is defined as minorities and members of the LGBTQ+ community on similarly boards of public companies with headquarters in California. Both of these laws have been the subject of litigation and, interestingly, the litigation was not brought by [00:06:00] companies that were subject to the laws and trying to push back on them, but instead

Terry: by advocacy groups from the conservative side of the political spectrum. Right now, both of those laws have actually been struck down at the trial court level. Most recently the gender diversity law was struck down, I think, in a decision that came out just a couple of weeks ago. The State of California is planning to appeal the decision on the gender diversity law, and I think no announcement has yet been made on whether they’re going to appeal the decision on AB 979 regarding a minimum number of directors from underrepresented communities. 

Joe: What is the argument that’s being made or arguments that are being made to push back on legally mandated diversity. 

Terry: Well, essentially, it’s an equal protection argument, so under the constitution of the State of California, but this would also frankly apply in the federal world as well, whenever you have a law that is specific to a particular group, like in the case of [00:07:00] the SB 826, and specifically tailored to women, then that triggers a particular level of scrutiny in terms of whether the law is appropriately tailored to address the discrimination that that group has experienced. 

Essentially, what the state is or what the plaintiffs have been arguing is that the State did not do a good enough job in adopting that rule to pass muster as a legitimate measure of equal protection. It is essentially challenging a couple of things. The State didn’t have enough of an interest in ensuring that boards have more gender balance, and that the State didn’t do a good enough job of showing that this was designed to address a pattern of specific discrimination. The trial court decision talks a lot about it sort of focusing on trying to achieve gender parity rather than remedying specific discrimination.

The way that the plaintiffs got to bring the claim was based on the theory [00:08:00] that they are California taxpayers and so as taxpayers, public funds are being used to track the data that the State is assembling, that’s part of the laws that the State is assembling, that it’s essentially kind of a database and companies have to submit reports, so that’s kind of how that played out at the trial court level.

Joe: Is the underlying argument something like, “We want to be able to pick the best people for our boards and this doesn’t allow us to do that”? Is that part of the fabric of this conversation? 

Terry: Yeah, that’s a big part of the fabric. I’ll not bore you with those sort of legal details of how the constitutional argument plays out, but in point of fact, that’s really what it’s about. It’s that, ” We don’t want to be required to pick a director who happens to be a woman or director who happens to be part of a member of an underrepresented community, we want to pick the best director whoever that is.”

Joe: There’s an underlying pushback that we’re being forced to put potentially unqualified people on boards.

Terry: Yes, that’s the [00:09:00] concern is that that instead of making a decision about a board member based on pure merit, that essentially the boards are going to have their nominating and governance committees, which are usually the ones putting together the slates of board members are having to put a thumb on the scale for women and for members of underrepresented communities and the result being that they’re not able to simply make a decision on merit.

Joe: Is the experience of many of the EU countries at all relevant in terms of what that has produced or is the legal structure so different than it really is not relevant?

Terry: I think it’s quite relevant actually. 

Maybe to provide a little bit of context in Europe, the European countries have taken a more bold and more kind of quota-based approach to trying to have board diversity, and they have been at it longer frankly. I think the first laws on this were adopted in Norway in the aughts, so this has been around for [00:10:00] awhile throughout the EU and in the UK as well. Essentially, I think the results we’ve seen in those countries is that boards have diversified significantly and one of the things that remains a question though is I think there was a theory that as the board diversified, that that would then have a trickle-down effect and diversify the management and diversify the companies as well. I think we’ve seen less of that than was expected, but nonetheless, the effect of these laws has been to cause the board forced to become quite a bit more diverse than they were in the first place, and that’s a strong step. 

I think once you have a board that has a number of diverse people on it, whether that’s women, members of underrepresented communities or otherwise, I think that sort of helps get the ball rolling and I think at that point then hopefully the board will maintain that level of diversity having kind of gotten over the hump. 

Joe: Among the stakeholders that probably have a position on this are investors, and [00:11:00] my understanding is that investors almost overwhelmingly think that diversity on boards is probably a good thing. Is that fair? 

Terry: I think that’s fair in talking about particularly the large investment funds, like the Vanguards, the BlackRocks and State Streets of the world and also a number of the big investment banks announced policies where they will cast their votes based on the levels of diversity, for example, on a board. 

We talked a little bit before though about this sort of groundswell of pushback, and I think that we are now starting to see a pushback on ESG generally and some pushback on board diversity as witnessed by the challenges to the California legislation and there’s also a core challenge going on in the Fifth Circuit in Texas over NASDAQ’s board diversity listing rule, which is somewhat similar. 

I think that the investment community has been the loudest voices have been in support of board diversity, but we’re certainly starting to hear other voices that are pushing back and saying, ” No, we [00:12:00] think you ought to be simply deciding board members based on the way we’ve always done it.” 

Joe: Isn’t the position that many institutional investors have taken that the diversity of boards, which has, for most people, been a critical element of how to make a strong and effective board reduces risk because with a diversity of perspective, diversity of skills, diversity of background, you’re less likely to miss stuff. If you’re an institutional investor putting millions of dollars into a company, you don’t want it to miss stuff. It seems logical to me, and I’m curious what aspect of the investor community is taking the position that being in a better position to identify and manage risk is not a good thing to look at when you’re investing millions of dollars in a company. What’s the argument against that? I really don’t understand it.

Terry: Well, I’ll see if I can argue against my own personal view, which is [00:13:00] I agree with you. 

Joe: I thought you might. 

Terry: Having that diversity of perspectives is really important, but kind of to be the devil’s advocate, the argument would be that, first, there are a number of studies that get talked about that show that there’s a correlation between share performance, the ability to respond to risk and show that companies that had women directors had stronger share values than companies that had all male boards, for example, and there are a host of those, and those often get cited by folks who were advocating for board diversity to say like, “Look, this is a good thing. This shows that not only is it kind of the right thing to do from the standpoint of society and having a more level playing field, but also it just makes economic sense.” 

The critics, on the other hand, will say, “Well, correlation doesn’t equal causation.” And so just the mere fact that you’re seeing both these things happen, you can look very closely at each particular study and try to figure out like, “Well, is it really caused by that, or were there other factors and so forth?” There are a number of [00:14:00] very prominent academics who have done deep dives on this and said, “Well, yeah, that’s true. Their correlation does not, of course, equal causation.” There’s that piece of it. 

I think the other sort of opposition to it is, it’s kind of framed almost in the broader opposition that you hear through affirmative action, which is that we shouldn’t be putting a thumb on the scale for people who happen to be women or for people who happen to be members of underrepresented communities and that we need to have a level playing field, and so what that means is that nobody gets an extra bump in the process. 

Joe: Interesting. 

One last question on this subject, which is that it seems like quotas is, I think you use the term “rough justice,” but I’m not sure there’s a better way to bring diversity or move the whole diversity issue forward other than quotas, because if you don’t do that, then it doesn’t look like it’s going to probably work. 

Terry: Well, I have to say I agree. I mean, there’s a lot of debate about this and different people have [00:15:00] different views about the benefits of quotas, and of course, there’s obviously lots of debate about whether they’ll stand up to a test in the courts. However, I agree with you. I think that it’s a rough justice approach in that it requires you to put different people on boards, but it does work. It does get there. 

One of the things that was a big factor in California’s consideration of the original legislation that requires a minimum number of women on boards is to say, ” We tried other approaches.” The state had back in, I think, the early 2000s adopted a lot of it and said they were going create like a registry of qualified women and minorities to be available for boards so that on the theory of like, “We’ll make a resource available,” and that didn’t change anything, and then sort of hortatory or disclosure-type requirements also didn’t really achieve much, and so it didn’t happen until we got there, and I do tend to think that the disclosure-based regimes are less effective. 

I mean, we’ll see with NASDAQ, because now there’s so much scrutiny on [00:16:00] this issue because technically the NASDAQ rule is not mandatory, it’s not a quota, it’s a comply or disclose and explain why. Essentially, technically, you’re not required to put more diverse directors on the board, you just have to tell people, but in today’s world, knowing that there would be a strong disincentive to having to explain why you couldn’t find a qualified woman for your board, you couldn’t find a qualified member of an underrepresented group. 

Raza: Terry, you just alluded to a little bit of a pushback on ESG coming up. Elon Musk recently tweeted that ESG is BS. As you know, the S&P ESG index has removed Tesla, but ExxonMobil is there, and so what is going on in that world? And why are we seeing pushback on ESG as well?

Terry: Well, I think one of the things that’s a challenge, and I kind of alluded to this in the first part of our discussion, is that ESG is such a broad measure, [00:17:00] and another thing that’s at play also is that there are so many different factors that go into the measure of ESG and there are a whole bunch of different metrics promulgated by different organizations that allow you to measure ESG that you can end up with some unusual results. I believe that’s kind of what happened in the case of Tesla being removed from the ESG index and Exxon staying on. The news reports indicate that the part of the reason was because of various issues related to Tesla’s addressing claims of racial discrimination and handling the NHTSA investigations about accidents related to their cars.

While, of course, Tesla is an electric vehicle company and its whole business is all about zero emissions, so I completely get why this would seem like an anomalous result and ExxonMobil is a fossil fuel company, so part of the challenge is you end up with these anomalous results because we don’t have a standardized way of going about it and in a way [00:18:00] it’s sort of shooting ESG movement in the foot, because it offers such an easy thing to point to, to say, “Well, this doesn’t make any sense.” 

Raza: I think as you rightfully pointed out, ESG is such a big topic and then turning it into an index or one number or one grade or one letter can really result in odd output or odd things coming out and muddying the water. Is there a messaging problem here as well where people just need to understand or elaborate better on what ESG really means and how to make that a more productive conversation? 

Terry: I think there’s a couple of things that that will need to happen in order to have it really be a more, as you say, productive conversation. I think one is, as I mentioned, kind of trying to come up with a standardized set of metrics that we all follow and that will take some shaking out in the market and perhaps a decision making on the parts of regulators to pick something to follow.

I think the other thing that’s tricky is that [00:19:00] particularly for public companies, they are under a lot of investor pressure and soon will be if the SEC climate-related disclosure rules get adopted in something close to what’s been proposed from a regulatory standpoint, companies are having to talk more about ESG and many companies are putting out voluntary corporate sustainability reports, for example, that talk about their ESG commitments and their goals and how they’re going to get there and so forth. 

One of the things that’s a challenge in that respect is that whenever a company, especially a publicly-traded company, is putting information out, is speaking publicly about its intentions, its goals, the metrics that it’s following, it now is subject to potential liability if, in fact, that is not consistent with what it has said in its 10-Ks and 10-Qs, for example, or if it’s misleading, if it kind of omits important information and the measures of those things are really [00:20:00] important,

I think one of the things that is challenging to navigate the ESG waters, especially for public companies, is that you have to figure out how to say things because you want to let the market know about your commitment, but at the same time, not set yourself up for liability, and that’s a huge challenge. 

Raza: I think you earlier said that you have to be careful and consistent, but in practice, what does that actually mean when companies are doing their corporate sustainability reports?

Terry: Well, what it means is reading that side by side with the 10-Ks and 10-Qs that you have for other periodic reports you’ve put out under your 34 Act reporting and making sure that sort of bottom line, you don’t have inconsistencies. That’s sort of number one. Making sure also that there’s information that’s in your corporate sustainability report that’s not in your periodic reports, like thinking about, “Well, why are we talking about it here? Why was it important enough to talk about here in the CSR, but it wasn’t material enough to talk about in our 10-K, and I [00:21:00] mean, they don’t have to be the same, of course. I mean, they’re not necessarily the same reports, but it’s important to give that some thought and to think about whether something that you’re talking about in your CSR is really something that’s truly material from a securities law standpoint that ought to be in your 10-K. 

Raza: From the company standpoint, it’s like saying you are being held accountable, but at the same time, you want to be able to protect yourself legally. 

Terry: Right. I mean, you have to be clear with the market and with all of your stakeholders, which would include not only your shareholders, but your employees and your suppliers and the communities in which you do business and so forth about exactly what you’re going to do and to be careful about not making statements that could be called greenwashing, not overstating what you’re going to do, and one thing that was a development this week is on Monday the SEC announced a settlement with BNY Mellon Fund that essentially assessed a fine against [00:22:00] them for greenwashing-type statements in the prospectus for their ESG funds. 

Raza: When the measure itself becomes the goal, people are going to kind of play all sorts of games so I think the trick or the key here is how to keep that conversation, disclosures real and really relevant to ESG rather than the so-called greenwashing.

Terry: Exactly. 

Joe: Stakeholder capitalism is one of the areas where you advise your clients. Let’s start with this, in August of 2019, the Business Roundtable issued its famous statement on the purpose of corporations that basically said that all stakeholders need to be taken into account. 

Their position is that since that statement, they’ve got a ton of criticism from the so-called Right, which said, “You went way, way [00:23:00] too far here,” and from the Left, which has said, “You really didn’t go far enough at all,” and their view is that means we probably did it right, because if we’re getting criticized from both sides, we probably did something exactly where we need to be for who we are. What do you think about that argument?

Terry: Well, I think that the Business Roundtable’s statement in August of 2019 really had an enormous impact on changing the conversation about stakeholder capitalism. It put that on to the front page of every business newspaper and it brought it to the forefront in a way that I don’t know that any other kind of initiative could have happened, so I think the mere fact of that was an enormous amount of impact and enormous amount of change, and of course the Business Roundtable represents the companies that are among the largest and the most powerful in the markets today, and that’s a [00:24:00] big deal that you have buy-in from companies that are the leading corporate lights, not companies that have kind of announced and made their whole business all about the environment, for example, but companies that are solidly in the mainstream, the biggest financial institutions, for example. I think that’s really a good thing.

I can see the argument to say like, “Well, if we’re getting criticized for both sides, that means we did something right.” They started the conversation, and I think that can have a lot of debate about whether you’re going far enough or whether you went too far, but like it or not, everybody’s talking about stakeholder capitalism and people have been thinking about how to incorporate that in considering how they run their companies. 

Joe: While we’re on the issue of pushback, there is among other things pushback on the notion of stakeholder capitalism. Could you talk a little bit about what you’ve seen out there by way of pushback on that concept in the recent past? 

Terry: Sure. Stakeholder capitalism [00:25:00] which we all understand as being kind of the idea of focusing on not only the interests of the company’s shareholders, but also on the interest of the company stakeholders, which is conceived more broadly to pick up employees and suppliers and the communities in which the company operates. 

The idea of stakeholder capitalism has gotten some pushback and there’s a lot of discussion around that particularly recently, and one thing in particular that I thought was quite interesting is just a couple of weeks ago it was announced that there is a new investment fund being formed called Strive which is going to be essentially focused on what they’re terming “excellence capitalism,” which I think kind of arguably the antidote to stakeholder capitalism in the sense that it is focusing on companies doing what they need to do and being excellent at their business, whatever that is, and essentially prioritizing the financial returns for their investors. If it’s an oil company, that it should be an excellent oil company. If it’s in [00:26:00] the business of making cars, it should be making the best cars, and that’s one example of the kind of pushback we’re seeing.

I think we’re seeing the pendulum kind of come back the other way. It sort of falls consistent with the pushback we’re seeing against board diversity. It’s consistent with some sense that the ESG ideas have gone too far in terms of, and, and there’s pressure on, on that too, given what’s going on in our economy, we know we’re in a circumstance where inflation is at levels that we haven’t seen for a long time, we’re seeing the market in, in a lot of volatility. And so, you know, that puts pressure on, on, you know, things that aren’t, you know, they’re purely tied to just the bottom line in the short term. 

Joe: So it’s, it’s really hard to push back against the notion of excellence. That’s something everyone can agree on, but isn’t this really a question of what excellence is. So for years, part of the risk according to a [00:27:00] lot of institutional investors was that the focus was on the short term and short term and short-term goals don’t put a lot of investors at ease, so the idea of really looking long-term and addressing issues that affect your business in the long term makes a lot of sense from an investor point of view, because we want our money to be safe more than just for the quarterly report. It’s not a quarter-by-quarter thing. We are investing in your company because we think it can grow. We think it can deliver returns. Why is it the short-term versus the long-term really the argument here as opposed to is this really excellence or not? Which seems to me to just kind of divert attention from the real issue. 

Terry: I think the short-term versus the long-term is really a good way to think about it, and that’s frankly, the way I look at it, I think that the debate probably hinges on things like, “Well, are you planning [00:28:00] for the long-term in a circumstance where you can really see around the corners, where you can really see what’s going to happen? 

Of course, it’s always difficult to predict the future, and depending on a particular company, you may have a greater ability to see what’s going to happen to you. Your company may be very much affected by foreseeable climate change and so you can kind of really easily plan for that and expect what’s going to happen. 

On the other hand, there are a lot of variables, and to me, I think the debate goes not so much around like short-term versus long-term because I don’t think anybody who’s opposing ESG would say, “Oh, well, we’re just focusing on the short term.” I think they’re focusing on the long term and it’s just a question of you may think this one thing is going to happen in the long-term and we think something else is going to happen in the long-term, and so we’re erring on the side of returning money to our shareholders versus thinking in broader terms, which is less certain. 

Joe: When you advise your clients about stakeholder capitalism, what do you advise them to do in [00:29:00] order to be able to manage this issue? 

Terry: I draw their attention back to their fiduciary duties because the bottom line is, as a director, you have fiduciary duties, and that’s what governs your job, that’s your north star in fulfilling your duties as a member of the board, and you have a duty of care, you have a duty of loyalty, and your duties under Delaware law, let’s assume most companies or most big companies are organized in Delaware, you have a fiduciary duty to your stockholder. 

I think then, Joe, this comes back to your thinking about short-term and long-term and how you look at it, so in advising directors, I would say, “Well, your fiduciary duty is to your shareholders. You don’t have a technical fiduciary duty to your stakeholders, but it’s a question of looking at the long term and looking down the road. Do you see that in order to operate your business in the longer term, you’re going to need to start planning for the effects of climate change? You’re going to need to start [00:30:00] pivoting away from a particular business because it has such a high carbon impact, or maybe you want to invest in something that is a carbon capture technology. It all does come back to your shareholders. From a legal standpoint, that’s still the guiding light. 

Joe: Yeah. That makes sense. Terry, it has been great speaking with you. Thank you so much for joining us today 

Terry: You too, Joe and Raza, thank you so much. 

Joe: And thank you all for listening to On Boards with our special guest, Terry Johnson. 

Raza: We have a request for our listeners. Please take a moment to rate and review On Boards Podcast on the Apple Podcast app if you enjoyed listening to it. It really helps other discover our podcast. Also, you can visit our website at onboardspodcast.com. That’s onboardspodcast.com. We’d love to hear your comments, suggestions, and feedback.

Joe: Please stay safe and take care of yourselves, your families and your communities as best you can. Raza, take care.[00:31:00]

Raza: You too, Joe.

Joe: Thanks.