Last week, Yale Law Professor Jonathan Macey published an article voicing sentiment I’ve heard for years about corporate sustainability and ESG initiatives: companies are doing the government’s job in advancing environmental protection, human rights and fighting corruption. In the article he stakes his position that:
… it is the private sector and not government that the ESG movement looks to for solutions to the major problems of the day…
The emergence of ESG investing and governance clearly demonstrates that there is a broad consensus that government lacks credibility and cannot be viewed by rational citizens as a likely source of solutions to these broad problems. In simple terms, government unresponsiveness and ineptitude have created a vacuum, and the ESG movement reflects a broad shift from primary reliance on government to primary reliance on the private sector as the source of solutions to broad social problems.
Thus, ESG investing and governance can be explained, at least in part, as a response to the failure of government.
He is right. I also agree with his point that the “profit-maximizing tradition” isn’t going away.
However, I’m not on board with his statement that long term management embodied by the ESG movement is “a convenient tool for enabling ineffective management to escape accountability.” This argument inherently limits success to short term financial performance without assigning value to investments in long term viability. Taking this position means that other investments in long term value creation – research and development for example – also “play conveniently into the hands of corporate managers who wish to avoid accountability.” You would be hard pressed to find a tech company that agrees their R&D investments have no value and are a mechanism designed to allow management to avoid accountability.
Historically, company leaders routinely generated profits while overtly sacrificing the environment, workers, communities and ethics. In today’s world, information technology makes an astounding amount of information available to the public in forms like satellite imagery, cellphone videos and searchable governmental filings. Social media exponentially and immediately amplifies company actions considered by the general public to be wrong, questionable or inappropriate. I would argue that corporate managers have never been more accountable for corporate performance expectations than they are now.
Then there is the matter of changing demographics creating new markets based on environmental, diversity and ethics attributes of companies. Corporate ESG performance is also a weapon in the war for talent (itself something with long term value implications).
What This Means
Companies may rightfully grumble to some extent about having to do the government’s job. However, by filling that role, companies create financial value and put themselves out there to be accountable to shareholders, the public and the government at the same time. Like it or not, companies tend to respond quicker to dynamic situations than governments, especially where more than one jurisdiction is involved.
As the public becomes empowered through technology (both in access to information and in the ability to easily spread information/influence others on a global basis), opinions manifest in actions against companies. Those choosing not to respond will be held accountable, finding themselves on the wrong side of buying preferences (consumer and B2B), investor actions, and employee loyalty/new talent acquisition.