Red Flags Everywhere! – Ten Risks for Directors – Week 2

Each week for the next 10 weeks, we will publish an installment of our Red Flags Everywhere! series, highlighting key risk areas that public companies and their board of directors should keep top of mind.

This series will serve as a lead up to MoFo’s upcoming Red Flags Everywhere! Tabletop program, taking place in our Palo Alto office on May 7. Members of our Securities Litigation, Employment and Labor, and Capital Markets Groups will guide attendees through a ripped-from-the-headlines fact pattern designed to spark interactive discussion and practical analysis that will be valuable to every board advisor.

This week, we examine the increasing politicization of corporate decision-making and the risks that can arise from engagement with social and public policy issues. Boards should approach these matters with heightened vigilance and ensure any action is firmly grounded in long-term shareholder value.

If you are interested in learning more about MoFo’s Red Flags Everywhere! Tabletop event, please reach out to Deborah Argueta. See all the Red Flags client alerts.

Board Engagement with Political and Social Issues Should Be Tied to Stockholder Value

 As political and social issues increasingly intersect with corporate policy, board action and inaction can trigger reputational backlash, regulatory attention, and investor scrutiny. Newly politicized issues can bring directors into new realms of controversy—often quickly and with limited room to maneuver. For companies that want to avoid being characterized as aligned with a particular side of the political aisle, the most durable starting point is fiduciary-duty basics: whenever possible, ground board-level decisions on political and social issues in a clearly articulable rationale tied to long-term shareholder value—and ensure the board’s process reflects good-faith engagement.

Recent litigation underscores this playbook. In Simeone v. Walt Disney Co.,[1] a stockholder filed a books and records complaint demanding to inspect records regarding Disney’s public opposition to Florida’s “Parental Rights in Education” law, which regulates classroom instruction on gender identity and sexual orientation in public schools. The Delaware Court of Chancery rejected the demand, emphasizing that directors have broad discretion to guide corporate strategy—including on social and political issues—and may weigh competing risks and opportunities. Although the outcome favored the company, the case highlights how quickly public engagement on politicized topics can generate Section 220 demands and litigation, which, in turn, may require boards to defend their process.

Similarly, in National Center for Public Policy Research v. Schultz,[2] a stockholder brought a derivative suit challenging Starbucks’ diversity, equity, and inclusion initiatives. The stockholder argued that the company’s approach reflected politicized decision-making. The court dismissed the complaint, cautioning that courts are not “investment counselors” or “political attachés” tasked with second-guessing reasonable, legal board decisions. Again, however, the case demonstrates the potential for litigation in response to perceived forays into politicized topics and why boards should be prepared to defend a disciplined process.

Given the prospect of litigation, here are four practical steps directors should consider to mitigate the risk of liability arising from engagement on political or social issues:

1. Anchor decisions to the business and shareholder value.

Start with the premise that corporate action on current affairs—even when intended to be neutral—may be viewed as political, and potentially offensive to one side of the political spectrum. If management recommends action on these topics, boards should push management for a clear “why”; focusing on how the action affects the company’s strategy, operations, workforce, customers, or regulatory posture. When action is deemed warranted, management should justify the action by its contribution to the company’s long-term success and communicate a profit/enterprise rationale that creates an objective basis for the action, which may reduce public scrutiny.

2. Exercise board-level oversight of public positions.

Where corporate speech or political engagement presents material risk, boards should ensure the company’s posture reflects board awareness and oversight—not unilateral executive action. Delaware’s view is clear: directors have broad discretion to guide strategy, including on social and political issues, and corporate speech involves tradeoffs that directors may weigh. The Disney record is an example of what such oversight might look like: the board held a special meeting focused on “Political Engagement and Communications,” including the communications plan and approach to legislation and employee response.

3. Emphasize process over outcome.

Ultimate liability often turns less on whether a decision was popular and more on whether directors can demonstrate a deliberative, good-faith process. Accordingly, board materials and minutes should reflect—at a high level—consideration of material risks, alternatives, and business impacts, and weighing competing considerations, before the exercise of sound judgment.

4.  Review alignment periodically.

Board process around political issues is not a one-time event. Rather, boards should periodically step back and assess whether the company’s political/social engagement remains consistent with long-term objectives and core business fundamentals. A periodic review may cover (i) public statements and escalation triggers, and (ii) company-specific risks around current affairs and brand/customer/workforce priorities.

In sum, courts do not require boards to avoid political or social issues. Indeed, Delaware law affords directors broad discretion. Directors, however, must act consistently with their fiduciary duties to the corporation and its stockholders and their decisions should be supported by appropriate board consideration.

You may use the following links to access our prior issues:

Red Flags Everywhere! – Ten Risks for Directors – Week 1 | Morrison Foerster

[1] 302 A.3d 956 (Del. Ch. 2023).

[2] Case No.: 22cv00267 (E.D. Wash. Sept. 11, 2023).