<!-- Swiftype Variables -->

Other Views

Shareholders face challenges from the potential liability risk of fossil fuel companies

Nell Minow
Nell Minow is vice chairwoman of ValueEdge Advisors, a McLean, Va.-based firm whose focus includes corporate governance engagement.

Is fossil fuel the new tobacco? State attorneys general think so. California Attorney General Kamala D. Harris has joined New York Attorney General Eric Schneiderman in demanding documents from Exxon Mobil Corp. on what the company's executives knew and did with regard to the risks of climate change. These documents could reveal that, like the tobacco executives, fossil-fuel company CEOs and boards acknowledged internally the damage caused by their products as they used company money to disguise the scientific findings and thwart regulation.

When corporate managers divert company resources to the detriment of long-term value creation, it is time for shareholders and the government to step in. That is why demands for documents from Exxon Mobil about any possible funding of climate-change-denial activity is vital to the interests of investors as well as taxpayers, regulators, scientists and everyone affected by climate change.

Companies have to make frank disclosures to their investors about the risks and opportunities that shape their strategies. So, if Exxon Mobil executives — or those at other fossil-fuel companies — knew that the risks of climate change were more severe than they led shareholders to believe, that could give rise to fraud charges. And investors and regulators need to know whether Exxon Mobil executives were acknowledging climate change risk internally, not disclosing it to investors, and thwarting the efforts of scientists and regulators by secretly supporting efforts to undermine the understanding of and response to climate change.

In other words, it might be that fossil-fuel companies like Exxon Mobil are like the tobacco companies in the 1990s. The tobacco industry undermined research about the connection between smoking and cancer for decades before entering into a $365.5 billion settlement in 1998. If fossil-fuel companies are anywhere near this liability risk, these investigations are the crucial first step in giving investors the information they need — the information the company did not give them — to evaluate their own asset allocation. And if tobacco is precedent, we can see other state attorneys general lining up with their own investigations as well.

Mr. Schneiderman, like his predecessor Eliot Spitzer in the pioneering investigation of Wall Street analysts, has the advantage of New York's Martin Act, an excellent tool for investigating complex issues of this kind. Within the realm of securities fraud, judges have ruled that it covers “all deceitful practices contrary to the plain rules of common honesty.” Therefore, it has often been used by New York regulators to tackle issues federal authorities have been unable to address.

One of the critics of Mr. Schneiderman's investigation, for example, claimed that even companies guilty of clear-cut illegality cannot be said to have lied about it as long as they said they “believed” they were doing the right thing, wrote John C. Coffee Jr., the Adolf A. Berle professor of law, Columbia University Law School, Nov. 23 in the law school's blog on corporations and the capital markets.

That misses the point.

Failing to be a good corporate citizen might not be lying, but relying on actual science for internal purposes while secretly funding efforts to misrepresent its findings publicly is. So learning more about who knew what when is the only way for regulators and investors to determine whether Exxon Mobil executives and board members violated their fiduciary obligation to be candid about risks, including liability for damages they could have prevented.

The Supreme Court's Citizens United decision that opened up the floodgates of unlimited and undisclosed corporate political contributions, often through “dark money” shell organizations that do not have to reveal their funding sources, distorts our political process and subverts transparency. That underscores the need for these investigations as crucial tools for the robust, market-based oversight that is the foundation of capitalism.

Nell Minow is vice chairwoman of ValueEdge Advisors, a McLean, Va.-based firm whose focus includes corporate governance engagement.