ESG Faces Tests of Staying Power: Will a potential economic downturn, or the ghost of Milton Friedman, dampen the social-purpose movement?

AuthorMilford, Maureen
PositionTHE CHARACTER OF THE CORPORATION

For more than 30 years, the accepted religion of corporate boards, investors, economists and the courts have held that the foremost obligation of directors is to take actions that make money for the owners of company stock. Directors who took steps to benefit other "stakeholders"--including workers, community, customers and suppliers --at the expense of the shareholder risked being in breach of their fiduciary duties.

In recent years, however, there's been a significant backlash against that orthodoxy with the rise of corporate sustainable investing.

Powerful investors, such as activist hedge funds and pension funds, have pushed back against shareholder primacy by evaluating a company's impact on the environment, society and corporate governance (ESG). High-profile examples include the social-good campaign targeted at Apple Inc. by activist investor Jana Partners LLC and the California State Teachers' Retirement System that calls on Apple to help reduce the harmful effects of smartphone overuse on children. Larry Fink, the CEO of BlackRock, the world's largest asset manager, has used his megaphone to tell CEOs that companies must show how they make a positive contribution to society.

But the ESG investing and decision model could be facing a major test of its staying power. If the economy softens or dips into a recession, the focus on social-good initiatives could be shoved aside by hard-nosed concerns about financial performance and share price. Nearly half of CFOs at American companies believe the economy will fall into recession this year, according to Duke University's CFO Global Business Outlook.

"We shouldn't kid ourselves and think it's 'Kumbaya' time," says Rick Wartzman, a director at the Drucker Institute and author of "The End of Loyalty." "I do think in this tug of war between shareholder capitalism and stakeholder capitalism, shareholder primacy is undoubtedly winning. I think if there's an economic downturn those pressures will undoubtedly grow."

There are several reasons for this. For starters, not all investors agree on what practice or initiatives constitutes a social good and can be in sharp disagreement. No less an investor than the legendary Warren Buffet has said that personal political views have no place in investing. "I'm not their nanny," Buffet said last year of shareholders and employees on CNBC.

And while millennial are said to embrace ESG investing and decision making, research shows actual investment in mutual...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT