Sunday, June 19, 2022

ESG & Communism?

Joel Slawotsky has published The Impact of Geo-Economic Rivalry on U.S. Economic Governance: Will the United States Incorporate Aspects of China's State-Centric Governance?, 16 Va. L. & Bus. Rev. 559 (2022). An excerpt:

China's corporate governance model emphasizes an extensive governmental role in the construction of economic markets. The paradigm consists of an economic-political syndicate of collaborative actors creating profit but whose critical core mission is to advance state objectives as defined by the ruling authority, the CCP. Economic interests thus serve political interests pursuant to a template of state direction and partnership with the private sector encompassing share ownership; industrial policies; governmental representatives embedded in the private sector; and discipline imposed for failing to comply with syndicate rules…. [S]ome in the U.S. political establishment are in favor of more governmental control to prevent corporate abuse …. To a remarkable degree, the dissatisfaction is already being manifested by attempts to engender greater government involvement in U.S. central bank policy by expanding the Federal Reserve's (“the Fed”) mandate to encompass a wider spectrum of goals to address social justice objectives…. Moreover, efforts to expand the Fed's mandate to encompass social goals should also be viewed in the context of proposals to embrace a model which modifies the existing U.S. capitalist framework. For example, Elizabeth Warren's Accountable Capitalism Act calls for employees of large firms to elect forty percent of all board members. Further corroborating this incipient trend is the fact that the CEOs of some of the largest U.S. businesses have declared their disagreement with the “shareholder-value” model, opining that a corporation's purpose is far more extensive and embraces many stakeholders. Such a view is diametrically opposite to long-standing U.S. economic governance. Another indication of a more state-centric economic model is the popularity of environmental, social, and governance (ESG).

Id. at 559, 578-79.

Stefan J. Padfield | Permalink


One would hope the the poster would have provided more context for those of us who lack the time to delve into the citation, given the provocative title of the post. Equating the popularity of ESG with the desire for a more state-centric economic model elides the issue that no one has ever bothered to define ESG with precision, so authors tend to define it in the fashion that best suits their argument. For example, the anti-woke movement defines ESG as exclusively non-financial, while there is no actual financial practitioner who ever views it that way. BTW, Warren’s bill, which will never pass, is designed to emulate the German, not Chinese, system. I wonder if the author considers Germany to be Communist.

While one might argue that the popularity of ESG, however defined, reflects a desire for more state control of the economy, some on the right see the rise of ESG as a reaction to the utter failure of state control of the economy. Here I quote friend of the Federalist Society Jonathan Macey, in a recent article: “ ESG investing and governance can be explained, at least in part, as
a response to the failure of government. People are turning to corporations for
solutions to problems that are in the proper domain of government because
government has failed. This explains the ‘E’ and the ‘S’ in ESG.”

Posted by: Paul Rissman | Jun 20, 2022 4:56:13 AM

Thanks, Paul.

On the point about people turning to corporations because government is failing, I’m coming around to the view that what many describe as governmental failure is actually government working as it should because when we are as evenly divided as a people on these issues, then government waiting for clearer marching orders is a feature – not a bug. For example, a recent survey found that while 82% of Democrats view climate change as a critical threat, only 16% of Republicans reported a similar level of concern. Additionally, while 71% of Democrats and Democratic-leaning Independents “place a higher priority on protecting the environment than on economic growth,” nearly as many “Republicans and Republican-leaning independents (68%) emphasize economic growth over environmental protection.”

On the point about no financial practitioner ever viewing ESG as an excuse to sacrifice profits in pursuit of some other preferred goal, I’ll simply quote the following from one of my papers:

This essay posits two related fact patterns that should concern advocates of good corporate governance. The first occurs when decision-makers expressly disavow any duty to maximize shareholder value, such as when Apple CEO Tim Cook told shareholders, “When we work on making our devices accessible by the blind, I don’t consider the bloody ROI [return on investment],” or when Ed Stack, the chairman and chief executive of Dick’s Sporting Goods, decided that Dick’s should “take a stand” on gun violence by foregoing the sale of assault-style weapons, and said in connection therewith, “I don’t really care what the financial implication is.”

Posted by: Stefan Padfield | Jun 20, 2022 5:50:00 AM

Hi Stefan
What I said was that no financial practitioner ever views ESG as exclusively non-financial. Your point is that corporate managers sometimes view ESG as non-financial, which is of course indisputable.

Posted by: Paul Rissman | Jun 20, 2022 9:23:55 AM

So the popularity of ESG means a more state-centric model? What a stretch.

And what a piece of clickbait. One quote is provided with no context, discussion, facts, or additional information.

The statistics you cited in the quote above only tell me that the majority of Republicans would rather sacrifice our environment for short-term profits that make the better long-term decisions. You can burn down your home for the insurance money, but where will you live?

I hardly see how the people pushing for more responsibility on the part of corporations leads to communism. People speaking out and speaking with their dollars defines freedom and capitalism.

I would also agree that maximizing stakeholder value as it has been defined in recent history is a poor goal. Businesses are not started to "maximize profit", they are started to achieve a vision. The term "stakeholders" should be much more inclusive than "stockholders".

Posted by: David A | Jun 20, 2022 9:59:18 AM

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