A company’s board meeting can quickly change from a routine discussion of strategy and compliance to a debate over how to respond to a politically charged issue. This scenario is no longer unusual, as boards are increasingly being asked to address complex and sensitive topics that can have significant consequences for the company’s reputation and bottom line.
The issue of how boards should govern politically consequential decisions is a critical one, as these decisions can have far-reaching implications for the company and its stakeholders. A governance framework can provide a structured approach to decision-making, helping boards to identify the key issues, evaluate the options, and make informed decisions that balance competing interests and priorities.
Defining Politically Consequential Decisions
A politically consequential board decision is a corporate decision that carries political or public-policy significance beyond the company’s ordinary business operations. These decisions can arise from a variety of sources, including shareholder demands, consumer boycotts, and changes in regulatory policies. The Walt Disney Company’s dispute with the State of Florida is a recent example of how a corporate decision on a politically contested issue can quickly escalate into a major controversy.
Boards are now being asked to respond to a wide range of issues, from diversity initiatives and artificial intelligence to changing state regulation and consumer boycotts. These issues can be complex, requiring boards to balance competing interests and priorities. Shareholder demands can also bring political questions into corporate decision-making, as investors press companies to reconsider their political activity and disclosure practices.
Recent corporate law scholarship has highlighted the challenges that boards face in addressing these complex issues. Companies operate in an increasingly polarized environment, where stakeholder demands and regulatory approaches may pull in different directions. Corporate commitments can also become harder to maintain as circumstances change, particularly after shifts in governmental power.
A Framework for Governance
The framework should be based on familiar legal principles, such as the duty of care and the business judgment rule, but it does not create new fiduciary duties. These principles can provide a foundation for decision-making, helping boards to address complex and sensitive topics.
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The framework should include several key steps, including establishing the corporate basis for action, identifying the fiduciary question, and developing an informed record, deliberating and documenting the decision, and revisiting and monitoring the matter. These steps can help boards to evaluate the options, weigh the risks and benefits, and make informed decisions that balance competing interests and priorities. By following a structured approach to decision-making, boards can reduce the risk of controversy and ensure that their decisions are in the best interests of the company and its stakeholders.
In the context of a politically consequential decision, the board should first establish the corporate basis for action. This involves identifying why the matter is one for the corporation and why it warrants action. The board should consider the potential impact on the company’s reputation, operations, and financial performance, as well as the interests of its stakeholders. By carefully evaluating the corporate basis for action, the board can ensure that its decision is informed and deliberate.
Once the board has established the corporate basis for action, it should identify the fiduciary question. This involves determining the corporate decision that the board is actually being asked to make. The board should consider the material risks associated with the available choices and the decision that directors must make on behalf of the corporation. By identifying the fiduciary question, the board can focus its decision-making on the key issues and ensure that its decision is in the best interests of the company and its stakeholders.
The board should then develop an informed record, which involves gathering the necessary information to evaluate the options and make an informed decision. By developing an informed record, the board can ensure that its decision is based on a thorough evaluation of the available options.
Finally, the board should deliberate and document its decision, which involves discussing the material risks, weighing the alternatives, and questioning the advice it has received. The board’s decision to speak out on a politically charged issue, for example, may be influenced by a variety of factors, including the potential impact on the company’s reputation and the interests of its stakeholders.
Implementing the Framework
The duty of care requires directors to inform themselves of material information reasonably available before making a business decision. The business judgment rule affords directors a rebuttable presumption that, in making a business decision, they acted on an informed basis, in good faith, and in the honest belief that the action taken was in the corporation’s best interest.
