Authored By: Similoluwa Esther Ajayi
Afe Babalola University
INTRODUCTION
For quite some time, corporate law in common law jurisdictions rested upon a single tenet: shareholder primacy.
By dint of this aged principle, a company board’s primary function was simply to maximize returns for its shareholders, and this tenet, originally established in early case law, as vividly illustrated in the seminal American case of Dodge v Ford Motor Co, dictated that directors were fiduciaries of investors alone, with social and environmental concerns consigned to the realm of generalized governmental regulation, rather than corporate governance meetings.[1] These narrow confines are no longer tenable. Climate change, economic disparities and shifting societal expectations have starkly illuminated the pitfalls of single-mindedly chasing profits. ESG considerations have become more than mere corporate social responsibility “nice-to-haves,” rather these are tangible financial metrics impacting risk, reputation and long-term viability, and globally investors and regulators expect boards to be proactively managing environmental liabilities, human rights risks and labour relations.
This transformation prompts an acute question of corporate governance for emerging economies: how can established directors’ duties law coexist with the pervasive influence of ESG considerations?
Emerging markets such as Nigeria, India and South Africa stand at an interesting crossroads: the urgent need for corporate investment to fuel infrastructural growth and economic development juxtaposed with the high vulnerability of businesses in these economies to floods, climate events, labour instability, and capricious regulatory changes, necessitating the need for their directors to balance immediate profitability with long-term viability. This article examines how ESG factors are being embedded in the directorial duties’ framework across selected emerging common law economies, utilizing UK law as the reference point. This study will scrutinise statutory provisions like Section 305 of Nigeria’s Companies and Allied Matters Act (CAMA) 2020, Section 166(2) of the Indian Companies Act 2013, and South Africa’s King IV framework, in order to illustrate that in modern company law, taking ESG factors into account is not merely an elective exercise for directors but that ignoring material ESG risks can itself constitute a breach of the duty of care, skill, and diligence.
THE STATUTORY LANDSCAPE: REDEFINING THE “BEST INTERESTS OF THE COMPANY”
The UK Baseline: Enlightened Shareholder Value (ESV)
To appreciate the shift in emerging markets, it is first essential to understand the UK, which served as the basis for the corporate law in many other Commonwealth nations.
The Companies Act 2006, in Section 172, enshrined the concept of Enlightened Shareholder Value (ESV).
Pursuant to Section 172(1), “a director of the company has a duty to act in a way that the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.” [2] Furthermore, Section 172(1)(a)–(f) lists several considerations that directors must have regard to when promoting the company’s success, including the long-term consequences of the decision, the interests of employees, relations with suppliers and customers, the impact of the company’s operations on the community and the environment and the need to maintain a reputation for good business conduct. [3] Under this UK regime, non-shareholder interests are not recognised in law in their own right, and they remain but a means to securing the long-term value of members.
Nigeria: CAMA 2020 and the Expansion of Fiduciary Obligations
Nigeria recently introduced a new regime in the corporate sector through the Companies and Allied Matters Act (CAMA) 2020 (the “new Act”), repealing the 1990 Act.
Section 305 dictates a director’s obligations. Specifically, Section 305(3) reiterates the traditional requirement that a director shall act in what he/she considers to be in the best interest of the company as a whole so as to preserve its assets and promote its business.[4] However, Section 305(4) goes further and expressly provides that “the directors shall have regard to: (a) the impact of the company’s operations on the environment and the community where it operates, and (b) the interests of its employees and members.”[5] The Nigerian regime has now moved towards a stakeholder paradigm and, by mandating that directors “shall have regard” to the environmental and community impact of the company’s business operations, effectively puts the onus on directors in that regard. Failure to do so might result in their being deemed to have acted in bad faith and against the company’s best interests.
India: Pluralistic Stakeholder Primacy under Section 166(2)
The Indian approach to directors’ duties diverges further from the traditional model.
Section 166(2) of the Indian Companies Act 2013 dictates that “a director shall act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community, and for the protection of the environment.”[6] Unlike in the UK where the welfare of employees, the community, and the environment is subservient to the pursuit of shareholder benefit, the Indian legislation gives parity to the interests of shareholders with those of the company’s employees, community and environment. As has been noted by the Supreme Court of India in Tata Consultancy Services Ltd v Cyrus Investments Pvt Ltd, “the new companies act,2013 lays down a more holistic view where companies are obligated to look at the interests of various stake holders such as shareholders employees community and environment in carrying on business” in their endeavour to carry on business for benefit of the members, community and stakeholders and in pursuit of company’s objects[7]
South Africa:
The King IV Regime and Tri-Capital Governance in South Africa, a combination of statute and corporate code governs directors’ duties; the Companies Act 71 of 2008 operates alongside the King IV Report on Corporate Governance (King IV).
Section 76(3)(b) of the Companies Act requires directors to perform their functions in good faith and in a manner that they reasonably believe to be in the best interests of the company.[8] The King IV Report conceptualises the “best interests of the company” by reference to its role as a corporate citizen operating in an interconnected system. It actively rejects short-term profiteering in favour of long-term value creation across three distinct dimensions: financial, human, and natural capital.[9] South African directors can be held liable for a lack of care and diligence if they disregard material environmental hazards or social labour issues.
JUDICIAL INTERPRETATION, FIDUCIARY DUTIES, AND THE BUSINESS JUDGMENT RULE
Historical Common Law Benchmarks
By way of a point of contrast with modern provisions, we can refer back to early case law.
In the English case of Parke v Daily News Ltd, it was held that payment of redundancy money to former workers after the sale of a company’s business was unlawful as the monies were not being paid to shareholders.[10] As Eve J put it, the law “does not recognise the reactivity of altruism in business”.[11] Furthermore, the duty of care/skill owed by directors historically imposed very low standards; in Re City Equitable Fire Insurance Co, it was held that a director only owed a duty of skill and care expected of a person having a particular personal background and experience, making it virtually impossible to successfully pursue action against negligent directors.[12]
Modern Duty of Care and Financial Materiality of the ESG
Given the stringent objective/subjective test stemming from Re D’Jan of London Ltd and now adopted in jurisdictions throughout the common law world, a director is assessed on how a reasonably careful person performing the same functions would act while considering the special skills and experience that director actually possesses.[13] In today’s business climate, it is undeniable that ESG risks, for example, physical risks posed by climate change, increasingly stringent environmental regulations, or the risk of stranded carbon assets, represent material financial risks.
Consequently, the director who fails to consider the financial implications of such risks on the company’s balance sheet cannot be said to be acting with reasonable care and skill.
It has been highlighted by both judges and commentators across the Commonwealth that climate change risks are no longer “distant and uncertain”. Instead, they are “now common business risks”.[14] There is no longer an excuse for boards to ignore the environmental risks facing factories or labour issues throughout their supply chains as non-financial, or political matters.
Protection Under the Business Judgment Rule
Often, directors are reluctant to invest in long-term sustainability (for example, the installation of cleaner energy systems or upgrades to employee safety equipment) for fear that short-term profits may fall and thus expose them to claims from shareholders.
This concern can be addressed by the Business Judgment Rule (BJR), codified into statute in, for example, section 308 of the Nigerian Companies and Allied Matters Act 2020 (“CAMA”) and section 76(4) of South Africa’s Companies Act.[15] Under the BJR, the courts are generally precluded from second-guessing directors’ business decisions, provided they meet four criteria:
The decision was made in good faith and for a proper corporate purpose;
The director had no personal interest in the subject matter of the decision;
The director took all such steps as they considered requisite to obtain sufficient information on the subject of the decision; and
The director honestly believed the decision was in the best interests of the company.
Provided the board document the reasons for its decision and rely upon credible expert advice concerning ESG risks, it will likely be protected by the BJR even if it opts to invest in risk mitigation strategies, for it is not the role of the courts to run businesses, only to review whether the process adopted by directors in making the business decision was a rational and appropriate one.
MANDATORY VS. SOFT LAW ESG DISCLOSURES IN EMERGING MARKETS
The Transition from Voluntary CSR to Mandatory Reporting
The growth in director accountability for ESG issues is also fuelled by an increasing move towards mandatory reporting from voluntary initiatives.
Nigeria’s Financial Reporting Council of Nigeria (“FRCN”) introduced the Nigerian Code of Corporate Governance 2018 (“NCCG”), principle 26 of which mandates boards to establish sustainability policies and to have regard to ESG factors[16]. Furthermore, the Securities and Exchange Commission (“SEC”) Nigeria Sustainability Disclosure Guidelines require listed companies to publish an annual sustainability report covering issues such as energy and water usage, workplace diversity and anti-corruption initiatives. In India, the Securities and Exchange Board of India (“SEBI”) has recently implemented the Business Responsibility and Sustainability Report (“BRSR”). SEBI’s reporting requirements now obligate the top 1,000 listed entities to report on how they are managing their environmental and social impacts, thereby making it imperative for boards to monitor such matters diligently.[17]
Greenwashing Risks and the Need for Disclosure Integrity
As reports now become mandatory, boards face potential legal liability for making misleading statements about the company’s environmental or social performance, what is often referred to as “greenwashing”. Under general corporate law, knowingly making material misrepresentations in annual reports or other public documents can expose companies and individual directors to fines, regulatory penalties, and litigation for fraud or misrepresentation. Directors are obliged to ensure that the information presented in ESG reports is accurate and reflects real-world operations.
In the recent case of ClientEarth v Shell plc, for example, activists initiated a derivative action against Shell’s directors in the UK in an attempt to hold them personally liable for their climate strategy pursuant to Section 172.[18] Although the UK High Court dismissed the claim on procedural grounds related to the ability to bring derivative actions, the case demonstrated the increasing willingness of stakeholders to seek legal recourse to challenge directorial decisions on ESG matters.
CONCLUSION AND RECOMMENDATIONS
Summary of Findings
The modern approach to corporate governance in emerging markets has moved beyond the traditional model of shareholder primacy to embrace a wider conception of the corporate interest. The key points from this article are as follows:
Statutory Changes: Legal frameworks, such as the CAMA 2020 (Nigeria), India’s section 166(2) of the Companies Act 2013 and South Africa’s King IV report, now increasingly recognise protection of the environment, community welfare, and employee interests as integral to the corporate interest.
Duty of Care: Increasingly, the consideration of foreseeable ESG risks is considered central to a director’s legal duty of care, skill, and diligence, given their potential impact on financial performance.
Legal Protection: Reasonable steps to manage foreseeable risks posed by ESG issues will, and should, be protected under the Business Judgment Rule so long as the directors act in good faith and based upon proper consideration of the issues.
Recommendations for Boards of Directors
To adhere to new legal standards and to avoid regulatory complications, corporate boards should adopt the following measures:
Establishment of Board-Level ESG oversight: Create a designated board committee to oversee sustainability, or delegate the responsibility for monitoring ESG risk to the audit and risk committee.
Inclusion of ESG risks in Risk Register: The company’s principal risk register should clearly include material environmental, social, and governance risks, climate risk scenarios and the impact of evolving environmental regulations.
Review of ESG Disclosures: Institute rigorous internal controls for ESG reporting data before its publication to prevent allegations of greenwashing and associated liabilities.
Board Education: Directors should receive regular training on new ESG laws and reporting requirements in the markets in which they operate, and their fiduciary duties with respect to such matters.
BIBLIOGRAPHY/REFERENCES:
Cases:
ClientEarth v Shell plc [2023] EWHC 1897 (Ch)
Dodge v Ford Motor Co 204 Mich 459, 170 NW 668 (Mich 1919)
Parke v Daily News Ltd [1962] Ch 927
Re City Equitable Fire Insurance Co [1925] Ch 407
Re D’Jan of London Ltd [1994] 1 BCLC 561
Tata Consultancy Services Ltd v Cyrus Investments Pvt Ltd (2021) 9 SCC 449 (Supreme Court of India)
Legislation:
India
Companies Act 2013
Nigeria
Companies and Allied Matters Act 2020
South Africa
Companies Act 71 of 2008
United Kingdom
Companies Act 2006
Books:
Bainbridge S, Corporation Law and Economics (1st edn, Foundation Press 2002)
Davies PL and Worthington S, Gower’s Principles of Modern Company Law (10th edn, Sweet and Maxwell 2016)
Kraakman R and others, The Anatomy of Corporate Law: A Comparative and Functional Approach (3rd edn, Oxford University Press 2017)
Journal Articles:
Armour J, Hansmann H and Kraakman R, ‘Agency Problems and Legal Strategies’ (2009) 31(2) Harvard Law Review 45
Johnston A and others, ‘Climate Change and Directors’ Duties in Common Law Jurisdictions’ (2021) 42(3) Company Lawyer 89
Keay A, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United Kingdom’s Enlightened Shareholder Value Approach’ (2007) 29(4) Sydney Law Review 577
Codes, Guidelines, and Reports:
Financial Reporting Council of Nigeria, ‘Nigerian Code of Corporate Governance 2018’ (FRCN, 2018) https://www.frcnigeria.gov.ng accessed 21 July 2026
Institute of Directors South Africa, ‘King IV Report on Corporate Governance for South Africa 2016’ (IoDSA, 2016) https://www.iodsa.co.za accessed 21 July 2026
Securities and Exchange Board of India, ‘Master Circular on Business Responsibility and Sustainability Report (BRSR)’ (SEBI, 2023) https://www.sebi.gov.in accessed 21 July 2026
[1] Dodge v Ford Motor Co 204 Mich 459, 170 NW 668 (Mich 1919).
[2] UK Companies Act 2006, s 172(1).
[3] UK Companies Act 2006, s 172(1)(a)-(f).
[4] Companies and Allied Matters Act 2020 (Nigeria), s 305(3).
[5] Companies and Allied Matters Act 2020 (Nigeria), s 305(4).
[6] Companies Act 2013 (India), s 166(2).
[7] Tata Consultancy Services Ltd v Cyrus Investments Pvt Ltd (2021) 9 SCC 449 (Supreme Court of India).
[8] Companies Act 71 of 2008 (South Africa), s 76(3)(b).
[9] Institute of Directors South Africa, ‘King IV Report on Corporate Governance for South Africa 2016’ (IoDSA, 2016) https://www.iodsa.co.za accessed 21 July 2026.
[10] Parke v Daily News Ltd [1962] Ch 927.
[11] ibid 963.
[12] Re City Equitable Fire Insurance Co [1925] Ch 407.
[13] Re D’Jan of London Ltd [1994] 1 BCLC 561.
[14] See Andrew Johnston and others, ‘Climate Change and Directors’ Duties in Common Law Jurisdictions’ (2021) 42(3) Company Lawyer 89, 95.
[15] Companies and Allied Matters Act 2020 (Nigeria), s 308; Companies Act 71 of 2008 (South Africa), s 76(4).
[16] Financial Reporting Council of Nigeria, ‘Nigerian Code of Corporate Governance 2018’ (FRCN, 2018) Principle 26.
[17] Securities and Exchange Board of India, ‘Master Circular on Business Responsibility and Sustainability Report (BRSR)’ (SEBI, 2023) https://www.sebi.gov.in accessed 21 July 2026.
[18] ClientEarth v Shell plc [2023] EWHC 1897 (Ch).
