The advancement of Environmental, Social, and Governance (ESG) activities are currently under threat from a right-wing backlash against so-called “woke capitalism.” However, the introduction of a corporate ESG technocracy, which prioritizes topical expertise and common procedures over politics, has been suggested as the potential solution for creating more purposeful and effective ESG programs.
There has recently been a concerted legislative attack on corporate ESG by right-wing lawmakers. Upwards of 181 anti-ESG bills have been suggested or enacted between 2018 and 2023. Financial institutions have been reacting. Only last month, JPMorgan Chase & Co. and State Street Corp. both withdrew from Climate Action 100+, the world’s largest investor coalition advocating for climate change.
Other companies are also reassessing their ESG priorities. ExxonMobil Corp. Executives have even initiated a high-profile legal dispute with two of its activist investors. These investors had proposed a climate-focused shareholder proposal to encourage the company to reduce its emissions. ExxonMobil countered this effort as an attempt to undermine its business.
To protect ESG from its critics, a new corporate governance model that addresses its major weaknesses is needed. Those who defend ESG typically support either of two models. The first entrusts corporate executives to manage the company on behalf of shareholders and pertinent stakeholders, and their preference for supposed benevolence. Alternatively, the second model looks towards shareholders and activists who champion social welfare goals via shareholder democracy.
Neither model sufficiently addresses the fundamental problems of accountability and coordination that arise when corporations choose goals that extend beyond the short-term pursuit of profit. The challenge of defining a corporation’s purpose has invoked vigorous debate in corporate law for over a century. This debate is fueled by concerns that arise when the ownership and control of a company become separated — a defining feature of modern corporations.
A widely accepted belief from the 1980s is shareholders can hold managers accountable for their decisions by limiting them to a single objective of profit maximization: As Milton Friedman famously stated, “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits.” (McKinsey, The New York Times).
The measurable, reviewable, and comparable nature of profit limits managers to this single target and restricts their influence. This method of corporate governance mitigates potential harm from granting managers a wider and more complex set of goals, requiring broader discretion.
Today, the pillars of corporate governance more than 40 years ago have started to crumble as millennials now expect more from businesses than simply turning a profit. The public is also becoming more wary of the social and political impact of major corporations. Over the past few years, corporate ESG operations have appreciated a favorable spotlight, focusing on its promise to marry profit and purpose.
In 2019, the CEOs of some of the largest companies in the US signed a corporate purpose statement that supported stakeholder interests and indicated a move away from the status quo. However, implementation of ESG still presents a thorny problem.
If managers are given control over corporate ESG, they become susceptible to self-dealing or co-opting corporate resources to advance their personal preferences. Furthermore, if shareholders are given this control, the company may suffer from micromanagement and internal disputes between groups endorsing varying environmental and social causes.
The solution to this conundrum lies in embracing the technocratic method for ESG, abandoning the politicized accounts and focusing on the development of specific, topical expertise and relevant, routine procedures. This allows them to overcome the fundamental problems that arise when managers or shareholders are trusted with leading corporations into supporting the common good.
In practical terms, this could take the form of a company-level skills matrix that identifies the climate or labor expertise of managers. It could also involve board-level committees identified and overseen by senior management, which are tasked with identifying emerging ESG risks. Routine ESG disclosures enable standardization, reviewability, and comparability across companies and issues.
Policymakers and investors seeking to take advantage of the ESG agenda while avoiding the dangers of shareholder and managerial unchecked domination should adopt this technocratic approach to ESG. This method of governance stresses institutional capacity, systemic oversight and decision-making, and procedural accountability.
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