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Governance by litigation: how courts strengthen board oversight of mission-critical ESG risks
Dissertation

Governance by litigation: how courts strengthen board oversight of mission-critical ESG risks

Chunlin Chen
Doctor of Philosophy (Ph.D.), Drexel University
May 2026
DOI:
https://doi.org/10.17918/00011491
pdf
Chen_Chunlin_20261,011.83 kB
PDF Embargoed Access, Embargo ends: 30 Jun 2028

Abstract

The 2019 Delaware Supreme Court decision in Marchand v. Barnhill clarified that directors may face liability when they fail to monitor mission-critical risks central to firm operations. Using this ruling as a shock to derivative litigation risk, I examine whether legal accountability affects firms' ESG performance. Using a difference-in-differences design, I find that Delaware-incorporated firms improve ESG performance relative to non-Delaware firms after the ruling. The improvement is concentrated in governance and, more importantly, in mission-critical ESG domains identified using SASB industry materiality classifications, with little evidence of comparable improvement in non-mission-critical domains. Decomposition analyses show that the gains are driven by strengthened management systems rather than changes in underlying risk exposure or disclosure alone. Delaware firms also become more likely to establish dedicated ESG oversight committees after the ruling. Cross-sectional tests show that the response is stronger among firms with weaker pre-period mission-critical ESG performance and in industries facing a broader set of mission-critical ESG risks. I also find evidence of reductions in toxic pollution emissions, suggesting that the response extends beyond ESG ratings and formal governance structures. Overall, the evidence suggests that derivative litigation can operate as a targeted governance mechanism that strengthens firms' oversight of operationally important ESG risks.

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