ESG, Externalities, and the Limits of the Business Judgment Rule: TEPCO Derivative Suit on Fukushima Nuclear Accident and the Expansion of Caremark

While there is a general agreement that corporate directors may consider stakeholder interests beyond legal requirements, opinions diverge on whether they are obligated to do so. The traditional approach emphasizes directors’ primary responsibility to the company and shareholders, granting them broad discretion in deciding how to improve the firm value. However, recent cases in Japan and the United States suggest a trend toward limiting this discretion. Tokyo District Court’s TEPCO decision found directors liable for inadequate tsunami preparedness that led to the meltdown of Fukushima 1st Nuclear Power Plant, while Delaware courts denied motions to dismiss by defendant directors for their breach of the Caremark duty of oversight, seemingly expanding its scope to cases where there were no specific violations of laws or regulations. This expansion, which may promote sustainability, potentially conflicts with the business judgment rule—a fundamental principle encouraging optimal risk-taking and value maximization. The combination of limited business judgment protection and extensive personal liability could severely discourage director risk-taking, potentially harming corporate and economic growth. This article examines when business judgment rule limitations are appropriate for businesses with significant negative externality risks. It analyzes the TEPCO decision and Caremark duty expansion, exploring various justifications and their implications. The article argues that oversight duties should be contextualized based on risk types and externalities. Given ESG’s broad scope—from climate change to human rights—careful unpacking of the concept is necessary to appropriately address serious externalities while avoiding excessive duty expansion’s negative consequences.