Who Directs the Directors?: Directors' Duties in the Modern Age of Activism

In a modern age of activism, with constant calls for more to be done in respect of Environmental, Social, and Governance (ESG) management, it is difficult for directors to keep well-informed in an ever-evolving space. As such, some activists have seen this as an opportunity to hold companies to account via their boards of directors, with a particular focus on their climate change policies. The High Court, in the case of ClientEarth v Shell plc [2023] EWHC 1897 (Ch), has recently provided some well sought clarity in this debate by refusing to permit ClientEarth, an environmental advocacy group with a minor shareholding in Shell plc, to continue with a derivative claim in respect of Shell’s management of climate change risk.

The Case – Directors acted in breach of their duty?

ClientEarth claimed that the company’s directors had acted in breach of their duties to promote the success of the company for the benefit of the members as a whole and to exercise reasonable skill, care and diligence under sections 172 and 174 of the Companies Act 2006, by failing to take adequate measures to prepare Shell for its low-carbon transition. In addition to these general duties, ClientEarth claimed that the company’s directors were also subject to a further six ‘incidental’ duties which arose when considering climate risk for a corporation such as Shell. For example, giving appropriate weight to climate risk and adopting strategies which are reasonably likely to meet Shell's targets to mitigate climate risk.

The Judgment – Courts will not act as a supervisory board

The Court held that given the subjectiveness of the directors’ general duties under the Act, there would be no breach if a director honestly, but unreasonably, believes that a particular course of action is in the company’s best interests. Judging on this would ‘cut across’ the well-established principle that the Courts will not act as a supervisory board over conclusions honestly made by directors. ClientEarth’s failure to appreciate that the administration of a business of the size and complexity of Shell would require the directors to take into account a spectrum of opposing factors, was moreover a ‘fundamental defect’ in its case. The proper balancing of such conflicts is a classic management decision with which the Court is ill-equipped to interfere.

As well as being ‘inherently vague and incapable of constituting enforceable personal legal duties’, the new incidental duties wrongly proffered the management of climate risk with an ‘overriding status’ over all other commercial decisions to be taken by the company. The Court held that the law does not superimpose on the general duties, more specific obligations as to what is and is not reasonable in every circumstance, and directors are required to manage the company's business with an open mind to the range of competing considerations posed.

The Future of Activism

With climate-related litigation on the rise globally, this case provides some useful guidance on directors’ duties within the context of climate change. Courts are extremely reluctant to get involved with commercial strategy, especially given that there is no 'universally accepted methodology' to determine how best to promote the success of the company, and will therefore leave directors to exercise their professional judgment on how best to balance these issues against other competing risks.

Activist groups will no doubt continue to look for novel ways to challenge board decisions and indeed, the litigation may in any case have served its purpose from ClientEarth’s perspective by drawing attention to Shell’s climate change policies in light of the publicity garnished. Although the judgment should provide directors with some comfort in the short-term, directors must still take steps to stay sufficiently informed on climate change and seek further advice where necessary, especially given ClientEarth’s intention to appeal.

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