Reforming Corporate Governance Is a Path to Better ESG Strategy

Environmental, social, and governance activity has become a major target in the right-wing campaign against “woke capitalism.” Corporate ESG technocracy that prioritizes topical expertise and relevant, routine procedures rather than politics could be a solution for more purposeful and effective ESG programs.

A turn away from corporate ESG is playing out against the backdrop of a forceful legislative attack by Republican lawmakers: At last count, 181 anti-ESG bills were proposed or enacted between 2018 and 2023.

Financial institutions are reacting to these attacks. Last month, JPMorgan Chase & Co. and State Street Corp. exited the world’s biggest investor coalition on climate change, Climate Action 100+.

Other companies are also shifting gears on ESG. Executives at ExxonMobil Corp. initiated a high-profile legal battle against two of the company’s activist investors, casting their climate-focused shareholder proposal, which called on the company to reduce its emissions, as a bad-faith effort to undermine the company’s business.

Saving ESG from its critics will require a new corporate governance model that overcomes its key weaknesses. Some anti-ESG advocacy is undoubtedly opportunistic, seeking to score political points by making a bogeyman of any decisions not rationalized in terms of short-term profit. But to dismiss all critique of ESG is misguided.

Accountability challenges riddle ESG governance and remain largely unaddressed by ESG’s supporters, who generally champion one of two ways to administer ESG.

One model relies on the benevolence of corporate executives, and empowers them to manage the corporation on behalf of shareholders and stakeholders who are affected by its business. A second model looks to shareholders and activists to champion social welfare goals using the tools of shareholder democracy.

Both models fail to address fundamental problems of accountability and coordination that arise when corporations adopt goals broader than short-term pursuit of profit.

The struggle for defining and administering a corporation’s purpose has animated a century of corporate law debate. At its heart is concern with the challenges that arise when ownership and control become separated—the defining feature of the modern corporation.

Since the 1980s, the idea has stuck that shareholders can hold managers accountable for their decisions by limiting them to a singular objective of profit maximization: In Milton Friedman’s famous words, “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”

After all, profit is measurable, reviewable, and comparable. Simplifying shareholders’ preferences to profit generation limits managers’ mandate to delivering on this singular goal. This way, modern corporate governance limits the potential for abuse that might arise from allowing managers to pursue a more complex set of goals that need broader discretion.

But today, the traditional assumptions that undergirded more than 40 years of corporate governance have given way.

Millennials expect more of the companies they invested in than just turning a profit, and the public is attentive to social and political impacts of corporate behemoths. For the past few years, corporate ESG appreciated a favorable spotlight, focusing on its promise to wed profit with purpose.

One of the most high-profile examples was a corporate purpose statement signed by CEOs of the US’ largest companies in 2019, which embraced stakeholder interests and signaled a shift away from the status quo. But the task of implementing ESG, even for those who take its goals seriously, remains a thorny problem.

If managers are left to decide corporate ESG, the criticism goes, then they’re vulnerable to self-dealing or coopting corporate resources to advance their own preferences. And if shareholders lead on corporate ESG, a company can become hampered by micromanagement and infighting among groups championing different environmental and social causes.

The solution to this is to embrace ESG technocracy—abandon politicized accounts of ESG and instead focus on developing specific, topical expertise and relevant, routine procedures. Such an approach would overcome fundamental problems that arise from simply trusting managers or shareholders to steer corporations to champion the common good.

In practice, technocracy could take the form of a company-level skills matrix that identifies managers’ climate or labor expertise, specific board or management-level committees tasked with identifying and overseeing emergent ESG risks, and routine ESG disclosures that allow for standardization, reviewability, and comparability across issues and between companies.

Policymakers and investors who seek to redeem the possibilities of an ESG agenda while avoiding the pitfalls of unfettered power for shareholders or managers should embrace technocratic approach to ESG. This framework emphasizes institutional capacity, systemic oversight and decision-making, and procedural accountability.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aisha Saad is associate professor of law at Georgetown University Law Center.

Write for Us: Author Guidelines