Directors and Officers and Peak Everything Responsibilities

Lack of transparent disclosure has been an aggravation since my days as an international equity analyst.  In my experience, there is only one solution to this aggravation:  research. (Occasionally a sharp stick poked at the company directors worked.) The following was prompted by attendance at the ASrIA conference in Hong Kong in September 2011. The challenge to learn as much about the environmental sector in one week for three reasons: (1) How quickly may a Director and Officer become “reasonably” informed? (2) Do Directors and Officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how?  This is what I learnt…..

Previous titles in this series and on this site are D&O and Peak Everything, D&O and Peak Oil - Carbon - Water - Food, D & O and the Bankers and Insurers.  The series runs sequentially over these various subjects.

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ASrIA Sustainable Investing Conference outcomes; 

What they wanted

The conference that prompted this series of blogs on Directors and Officers and Peak Everything, was perfectly constructed in what they called “Across the Value Chain” of investing.  They had senior executives of stock exchanges, of index managers, of mutual and pension funds, of fund managers, of union trustees of funds, to different style of fund managers, and insurers, and associations, and assets allocators, from all regions of the world.  That is, the entire value chain of investing.

At the end of the conference, during the summary a couple of key ideas emerging from the delegates were presented.  Key of these, and discussed at some length, to paraphrase, were:

·         “new regulation to force companies to measure, monitor and report their sustainability footprint”; (that is, investment managers wanted this information but couldn’t get it from Directors and Officers of companies) and 

·         that companies be required to make an “externality statements” (different from the above); and

·         the lament that when companies are reporting their sustainability foot print information as part of the mandatory reporting and disclosure regime, “ investors were not rewarding them for it”. 

Whatever the dis/agreement about whether these are correct or not, they were clearly the outcomes from the meeting of minds of the international executives.

It was at this point that an out of body experience started happening;  like watching a ventriloquist and their puppet.  You see the mouth open and shut on the puppet, and yet you know that the person saying the words must be the person sitting beside them, but you keep watching the puppet.  It was a state of cognitive dissonance. The words didn’t appear to match the reality of the world as it already exists.

Because if I had been attending a conference of Directors and Officers, the latter would have been saying the direct opposite; that there is too much regulation and reporting required already, of such scope, that it stifles and confuses investors. 

The dissonance was between wanting more regulation to force companies to price and report their externalities on the one hand, and the existing mandatory and non mandatory international regulation on the other, that on its face, already requires companies to do exactly what was requested by the conference. 

In the end, there was a call for regulation at the conference, that as a Director and Officer I believed was already in law.  Hence this research on Peak Everything and the questions (1) How quickly may a Director and Officer become “reasonably” informed? (2) Do Directors and Officers need to know about it to survive? (3) If so, what should they be disclosing to shareholders and how?  

Directors roles responsibilities and legal obligations / Pricing externalities

The first question took a week, so there can be no argument that a Directors and Officer can become quickly informed on the peak of resources on there doorstep.

The answer to the second, does Peak everything matter, is “yes”.  In the preceding reports on this website, I have considered Peak Oil, Carbon, Water and Food.  And each and every one of those topics based on reasonable research is hitting the tipping point into resource depletion. 

It remains difficult to understand, having done the research, how any Director and Officer would not be considering the risks of resource depletion within the business plans today.  And the potential for catastropic risks to their businesses. 

“Oi, that’s bad news then.  The wife’s a bit worried too.  What about your company?”  Don’t know.  “But haven’t you checked it all out?” No.  “What about the oil thingey?  Doesn’t it worry you?” No.  “But why not, sounds pretty serious to me.”  Don’t know.  “Well what about my shares then? Are they safe?” Don’t know.  “You donna care?” Nuh. ........And so goes the discussion on peak everything between the “reasonable man” on the omnibus in Clapham[i] and the Director / Officer of a large listed company. 

It could just as easily represent the business man on his way to work by fast train in China, by rickshaw in Phon Pen, ferry in Sydney, or the metro in London. 

This legal term would be familiar to any Director or Officer in countries with the Westminster legal jurisprudence.  In common law it is an objective measure against which any individual’s conduct can be measured for determining negligence in both criminal and common law.  If there is a duty of care, and an objective standard has been breached, then liability could arise. Some criminal, some common law.

Otherwise, the business judgement rule whereby Directors and Officers must only ensure that they are reasonably informed before making a decision, applies (as a generalisation). And they will be measured against their peers.  I think the series of reports so far on this blog, proves that it is so easy to be reasonably informed on this topic that that defense would fail.

Arguments Against Directors Roles and Obligations

Directors and Officers do not have obligations to individual shareholders nor anybody / thing else other than to the company; and their fiduciary duty to shareholders extends only to loyalty and care.  Few people understand that.  Unless a Director of a fund manager, or bank, or trustee, who have fiduciary obligations there are few obligations to anybody.  Indeed it has been expressed in the following quite clearly that a Director and Officers obligation on the part of the company is to optimise every known resource until there are none left, without any comeback whatsoever.

 “In The Failure of Corporate Law, (pp. 73-74) Professor Kent Greenfield of Boston College observes that the law normalizes, and even defends, corporate law breaking. He summarizes the recommendation of widely quoted legal scholars Fran Easterbrook and Daniel Fischel that “corporations should, with some exceptions, seek to maximize profits even when they must break the law to do so… . As long as the expected penalties from illegality are less than the expected profits, the corporation should act illegally.” According to Professor Greenfield “there is not a single contemporary example of a court finding that managers breached their fiduciary duty by causing a firm to break the law when it was profitable to do so.””[ii]

This is the classic, do first and apologise later, strategy.  Increasingly the latter part is going to cost shareholders money in the form of fines or judicial orders. BP is an example, and so is News of the World which ended in the papers complete demise, losses of jobs, and hopefully billions in restitution.  The Global Financial Crisis is another, that has yet to completely play out with Occupy Wall Street going global and viral.

In all cases, on opposite sides of the world, the outrage of the populace caused intervention by governments.  And significant cost,  including criminal charges, to companies, possibly their Directors and Officers. 

And willful blindness is not a legal defense, however I think this paper has shown it is near impossible to use that as a defense given the sheer scale of published data on Peak Everything. Courts appear to rule that a defendant should have known and the consequences are defined as criminal negligence.

Strategies For Directors and Officers Reporting

It strikes me that using all resources to their extinction is not a good short or long term strategy for a company.  Maybe outsourcing operations risk to another country, such as China, short term, appeals, but it would appear that there had better be a plan B because that is not going to last too long either. 

I once had a highly respected Managing Director say to me that boards should not be concerned with social issues.  “Our responsibility is to shareholders, and that means profit”. His customers were retail; his company employed tens of thousands of ordinary people; largest market share in Australia.  That company survived the GFC but what if it hadn't.

Certainly, the first stop would have to be the company’s Directors and Officers insurance.  Are you covered for gross negligence?  For all the legal risks in a space where class actions are rising?  What about reputational risk, could the company recover?  What about government intervention?

It is reported “Many lawyers believe that [environmental] cases could follow the trajectory of tobacco and asbestos litigation, saddling high emitting companies that failed to act on GHGs, with potential massive claims for damage (Lambert 2004)”

The final response of Directors and Officers would be to measure, monitor, report and manage your FOWC Peak footprint.  And build strategies around that to mitigate risks, because as mentioned before, everybody else is starting to measure it for you.  Of course evan if measuring your FOWC Peak footprint, you could still keep chewing through resources until they are all gone, your costs will rise exponentially, but at least you will be able to measure when the last tree is standing so you can substitute it with something else. There’s a plan.

HE was the last tree standing no more could there be found the last one of a dying breed growing strong in fertile ground they slaughtered all his relatives his sister, mom, his dad his brother, uncles, cousins and all the friends he had 

He watched how humans killed with their loud machines and saws sparing nothing for the future  dismissing Mother Nature's laws there would be no other trees for kids to climb and play

no more playing hide and seek nor a shaded place to lay

He knew his time was over  in minutes he would die

He stood up to his full height so they would never see him cry have you any last words old tree

before we cut you down only a few said the ancient tree please gather all around from the very beginning of your time   we have kept your kind alive  we have made your sturdy houses as you used us to survive  we were boats for you to travel wood for your steaming train shade from the hot, hot  sun and shelter from the rain yes

He told the murderers come close and you shall see as they all danced and laughed at the ancient dying tree laugh you greedy people you shall never be denied your greed is your undoing as you are never satisfied spend your money quickly spend your blood money fast it will only buy you possession and possessions never last how will your kind ever survive clearing everything from the ground building your ugly buildings blind to beauty all around they killed the tree with fury as He fell on grass and cried a tear fell from God's very soul as the last tree on Earth had died~[iii]

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[i] Wikipedia:  The man on the Clapham omnibus is a reasonably educated and intelligent but non-specialist person — a reasonable person, a hypothetical person against whom a defendant's conduct might be judged in an English law civil action for negligence. This is the standard of care comparable to that which might be exercised by "the man on the Clapham omnibus" mentioned by Greer LJ in Hall v. Brooklands Auto-Racing Club (1933) 1 KB 205.  In Australia, the "Clapham omnibus" expression has inspired the New South Wales and Victorian equivalents, "the man on the Bondi tram".^[5] and "the man on the Bourke Street tram".^[6] In Hong Kong, the equivalent expression is "the man on the Shaukiwan Tram." http://en.wikipedia.org/wiki/Man_on_the_Clapham_omnibus

[ii] How to Liberate America From Wall Street Rule, July 2011, primary author David Kortenhttp://www.neweconomyworkinggroup.org/sites/default/files/LiberateAmericaONLINE.pdf[ii]

[iii] http://open.salon.com/blog/scanner/2011/03/23/the_last_tree_standing