Corporate Governance in the ESG Era: Can France Help the U.S. Catch Up?

Inès Lechani

In December 2023, the European Council and Parliament reached a provisional deal on the Corporate Sustainability Due Diligence Directive (CSDDD), which aims to establish a due diligence duty for corporations to identify and mitigate potential environmental and human rights risks related to their operations.[1] Inspired by the French devoir de vigilance (vigilance duty), the directive is the latest illustration of efforts at the EU level to provide a regulatory framework for corporate social responsibility. While France has taken the lead in establishing an ESG regime, building on a supranational impulse initiated by the EU, the U.S. is lagging behind because companies and government actors are unable to decide on the importance to give to ESG considerations.

The U.S. corporate law has traditionally followed a shareholder primacy view. According to this theory, the sole purpose of a corporation is to use its resources to engage in activities designed to maximize profits for the benefit of its shareholders.[2] This perspective is still largely reflected in the American model of corporate governance. Under Delaware law, a corporation may be incorporated or organized “to conduct or promote any lawful business or purposes.”[3] The definition already implies that the primary purpose of a corporation is to make a profit. Courts have reaffirmed this profit-maximizing approach,[4] even though some rulings have protected directors’ decision-making, so long as it promotes long-term shareholder value.[5] Furthermore, the agency relationship between managers and shareholders, characterized by binding fiduciary duties, prevents executives from making the corporation’s social, environmental, and ethical impact a priority.[6] Directors are incentivized to prioritize shareholder interests and avoid self-dealing as otherwise “the board risks losing the presumption of the business judgment rule.”[7]

On the other hand, the notion of “stakeholderism” has been more widely accepted in France. French law defines a corporation as an entity established by two or more persons who agree by contract to allocate assets for the purpose of sharing the profits resulting from the business.[8] The main characteristic of the French corporation is that it exists as a separate legal entity, independent of the persons of its shareholders. Rather than having fiduciary duties to the shareholders, the management must first and foremost act in the company’s best interests.[9] This means that the duties of corporate officers extend beyond shareholders to encompass the corporation as a separate moral person.[10] As a result, rather than evaluating a business decision in terms of shareholder interest, courts often consider compliance with the intérêt social (social interest).[11]

This difference in approach to a company’s purpose explains why the two countries have adopted such different ESG regimes.

In the U.S., tax incentives and low-cost credits are often used in place of mandatory regulation. The U.S. has also focused on requiring disclosure of material information to improve investor transparency regarding the ESG impact of their investments.[12] At the state level, related regulations remain highly disparate. While California passed two major climate-related bills in October 2023 that will require certain companies to disclose their direct, indirect, and value chain greenhouse gas emissions,[13] other states have adopted actively anti-ESG laws.[14] At the federal level, efforts are underway to standardize corporate disclosure requirements. Under the Securities Act of 1933, public companies are required to disclose certain information deemed important to investors, including details of ESG risks. More recently, the SEC announced the adoption of several disclosure rules aimed at standardizing climate-related information for investors,[15] improving disclosure of cybersecurity incidents, management and strategy,[16] and ensuring that funds whose names indicate a focus on environmental, social or governance factors invest at least 80% of their assets accordingly.[17] Even more recently, the Biden administration supported the Inflation Reduction Act (IRA), which aims to achieve climate change goals, including reduction of greenhouse gas emissions in the United States.[18] While these measures are encouraging, their real effect remains to be proven.

France has chosen a different path. The movement to codify ESG principles in law seems to have gained more ground in France. In 2019, article 1835 of the French Civil Code was amended to allow bylaws to specify a raison d’être (corporate purpose), “consisting of the principles the company adopts and for which it intends to allocate resources in the exercise of its activity.”[19] Most companies that have adopted a raison d’être have emphasized their desire to develop a sustainable enterprise.[20] This legislative amendment is favorable to ESG, as a raison d’être specified in the bylaws would be binding on corporate managers, who would have to take it into account in their decisions.[21] However, in practice, many companies have adopted a raison d’être in a public statement to improve their public image, without incorporating it into their bylaws, which deprives it of any binding effect.

The French legislature also adopted the law of 27 March 2017 relating to the duty of vigilance (devoir de vigilance) of parent companies and ordering companies.[22] By passing this law, France has become the first country to impose a positive due diligence obligation on companies regarding their environmental footprint. The text requires the implementation of a plan that includes “reasonable vigilance measures.”[23] However, in the event of non-compliance, only civil remedies are available,[24] and French courts have been reluctant to recognize the liability of certain companies.[25] Inspired by this law, the CSDD will extend the obligations to a wider range of companies. Like the U.S. strategy, France has also extended reporting obligations to companies.[26] In addition, the French legislature has adopted governance rules to take better account of diversity in board representation.[27]

Although the main limitation of the French is the lack of effective sanctions, the U.S. urgently needs to start implementing a comprehensive ESG regime, and it could learn from the French model to do so. Current inefficiencies suggest that it is illusory to think that the U.S. can solely rely on its traditional stakeholder model. At the same time, widespread belief in stakeholder primacy makes it unlikely that the U.S. will make a complete change and adopt a French-style model. One solution could be the creation of a hybrid ESG regime, relying on the central role of shareholders to force management to take their ESG interests into account, while relying on government officials to impose certain mandatory regulations concerning diversity and due diligence.

The U.S. could benefit from growing shareholder interest in sustainability development. Indeed, ESG activism has become more widespread in the U.S. in recent years. In January 2024, Exxon Mobil Corp filed a lawsuit to prevent a climate proposal from activist investors from being put to vote at the company’s shareholder meeting scheduled for later this year.[28] The company claims that the activists are “driven by an extreme agenda” that does not serve investors’ interests or promote long-term shareholder value.[29] The defendants argue that the company’s shareholders should have the right to vote on whether Exxon should align its emissions reduction targets with the Paris Climate Agreement.[30] This ground-breaking case highlights the power that activist shareholders can play, but it also may show a need to protect them from potentially deterrent legal action.

While an effective ESG model in the U.S. can rely in part on the private sector, some changes need to be driven by government, even though this may be a difficult proposition given current political conditions. This is where the U.S. could learn the most from the French model. One proposal would be to pass laws reinforcing diversity in governance by requiring listed and unlisted companies of a certain size to take account of diversity and parity in board representation.[31] Another proposal that seems necessary would be to impose a due diligence duty, similar to the French and European vigilance duty, on parent companies and conglomerates, to make them accountable for their ecological impact. This reform is all the more necessary given that American companies operating within the European Union will soon be affected by the entry into force of the Corporate Sustainability Due Diligence Directive.

Even if France could inspire the U.S. to catch up on ESG to some extent, the comparative analysis has certain limitations. Indeed, certain specificities of the different legal systems need to be considered. Beyond the difference in ideology, the risk of litigation is much greater in the U.S. and may limit the role that mandatory regulations could play. This may explain why France has been more open to ESG, given that the legislature has enacted ESG regulations but has not specified effective sanctions. As a result, the legal system largely refrains from sanctioning companies, making litigation much more difficult for shareholders. In contrast, commitments of this type create significant litigation risks in the U.S. Indeed, in a highly litigious legal system, lawyers armed with contingency fees have a stronger incentive to bring litigation.

Despite these differences, it is clear that the U.S. urgently needs to catch up, and that it could, to a certain extent, draw some inspiration from the French ESG regime to build its own model.

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[1] Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. Note that after long delays, the European Commission finally approved the Directive on March 15, 2024. However, in order to reach an agreement, the final text was considerably narrowed down from the initial draft.

[2] Milton Friedman, A Friedman Doctrine - The Social Responsibility of Business Is to Increase its Profits, N.Y. Times, Sept. 13, 1970, at A17 (“That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”).

[3] DGCL Tit. 8, §101(b).

[4] Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919) (holding that management’s decision to not distribute special dividends in order to share profits with consumers by reducing the price of cars constituted a breach of its fiduciary duty to shareholders).

[5] See, e.g., Kamin v. American Express Co., 383 N.Y.S.2d 807 (N.Y. Sup. Ct. 1976) (holding that, under the business judgment rule, it was justified for the directors to intentionally incur losses for the purpose of improving reported earnings and thereby maintaining the price at which the company’s stock was traded); TW Servs., Inc. V. SWT Acquisition Corp., Civ. A. Nos. 10427, 10298, 1989 WL 20290 at 7 (Del. Ch. Mar. 2, 1989). See also Leo E. Strine, Jr., The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 791 (2015) (arguing that Delaware Law is about the primacy of shareholder welfare and not necessarily short-term profit maximization as directors must maximize “the long run interests of shareholders”).

[6] Milton Friedman, A Friedman Doctrine - The Social Responsibility of Business Is to Increase its Profits, N.Y. Times, Sept. 13, 1970, at A17 (“As a corporate executive, the manager is the agent of the individuals who own the corporation […] and his primary responsibility is to them.”)

[7] William M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr, A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law, 116 Penn. St. L. Rev. 837, 845.

[8] Code civil [C. civ.] [Civil Code] art. 1832 (Fr.)

[9] Forrest G. Alogna et al., The Shareholder in France and the United States: a Comparative Analysis of Corporate Legal Priorities, Business & Law Review, Business & Law Association (Association Droit & Affaires (AD&A)) Paris, 17th Ed. 2020 at 94.

[10] Id.

[11] Id. Code civil [C. civ.] [Civil Code] art. 1833 (Fr.): “the company is managed in its social interest (intérêt social), taking into consideration the social and environmental challenges of its activity.”

[12] See A. R. Brownstein et al., The Coming Impact of ESG on M&A, Harv. L. Sch. F. on Corp. Governance (Feb. 20, 2020), https://corpgov.law.harvard.edu/2020/02/20/ the-coming-impact-of-esg-on-ma/.

[13] Cal. Health & Safety Code §25.5. (2006).

[14] As of September 2023, 20 states had effective anti-ESG rules. This creates a fracture with the efforts led at the federal level by the U.S. Securities and Exchange Commission (SEC) to create a uniform regulatory regime.

[15] The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11275, 34-99678 (March 6, 2024), https://www.sec.gov/rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors.

[16] Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989 (July 26, 2023), https://www.sec.gov/rules/2022/03/cybersecurity-risk-management-strategy-governance-and-incident-disclosure#33-11216.

[17] SEC Adopts Rule Enhancements to Prevent Misleading or Deceptive Investment Fund Names, Release No. 2023-188 (Sept. 20, 2023), https://www.sec.gov/news/press-release/2023-188.

[18] Pub. L. 117-169 (2022).

[19] Code civil [C. civ.] [Civil Code] art. 1835 (Fr.).

[20] Examples of raison d’être include Atos’ (“guaranteeing safety, inclusion, security and trust in the digital space; contributing to the environmental transition; promoting scientific and technological excellence”) and Carrefour’s (“Commit to the food transition: this means providing accessible, quality, healthy, and environmentally-friendly products for everyone”).

[21] Code de commerce [C. Com.] [Commercial Code] art. L. 225-35 (Fr.). See also, Opinion of the Conseil d’État on the draft PACTE law (2018) at 39; Dalloz éditions législatives, Droit des affaires, Une gestion des sociétés encadrée par l’intérêt social et la “raison d’être, 24 mai 2019; De nouveaux enjeux pour la gestion des sociétés – intérêt et raison d’être des sociétés, BRDA 10-19; C. Blondel, Intérêt social élargi, raison d’être et société à mission dans la loi Pacte : la grande illusion?, RICEA n4, août 2019, comm. 12.

[22] Law n° 2017-399 of March 27, 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre.

[23] The goal for these measures is to “identify risks and prevent serious violations of human rights and fundamental freedoms, health and safety of persons and environment resulting from the activities of the company and of the companies it controls, either directly or indirectly, as well as the activities of subcontractors or suppliers with whom an established business relationship is maintained.” Law n° 2017-399 of March 27, 2017 relative au devoir de vigilance des sociétés mères et des entreprises donneuses d’ordre. The duty is imposed on companies incorporated on the French territory, that employ at least 5,000 employees directly or indirectly (through their subsidiaries) as well as corporations headquartered in France or abroad with 10,000 or more employees. Code de commerce [C. Com.] [Commercial Code] art. L. 225-102-4 (Fr.).

[24] Code de commerce [C. Com.] [Commercial Code] art. L. 225-102-4 (Fr.). Also note that the law does not specify who has standing.

[25] TJ Paris, Fev. 28 2023, 22/53942; TJ Paris, Fev. 28 2023, 22/53943 (both rejecting NGOs’ demands to enjoin TotalEnergies to comply with its due diligence duty).

[26] NRE Law 2001-420 of 15 May 2001, art 16; Grenelle 2 Act 2010-788 of 12 July 2010, art. 225.

[27] Code de Commerce [C. COM] [Commercial Code] art. L. 225-71 (Fr.); Code de Commerce [C. COM] [Commercial Code] art. L. 225-18-1.

[28] Exxon Mobil Corp. v. Arjuna Capital, LLC (N.D. Tex.) 4:24-cv-00069.

[29] Id.

[30] Id.

[31] The issue is whether jurisdiction to impose such an obligation belongs to the federal or state government. Senators Elizabeth Warren and Bernard Sanders both introduced bills for federally chartered corporations that would do some of this. They both failed.