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INSIGHT: GCs Must Balance ESG in an Age of Activism

March 4, 2020, 9:00 AM

The ESG revolution is here, and it is as vague as it is vogue.

A leading ESG authority found that over 50% of institutionally held assets in Europe are invested sustainably. In the United States, about a quarter of large-investor assets are in sustainable investments, reflecting a growing interest from high-profile venture capital firms.

Recently, hundreds of leading U.S. CEOs declared that shareholder value was no longer their main objective. Naturally, ESG ratings agencies have sprung up to evaluate corporations.

I have yet to encounter one clear definition of what “it” is and is not. The only consistent thing “experts” seem to agree on is that companies cannot simply focus on financial performance and shareholder return; they have a greater responsibility to their broader communities, its citizens, society, and the Earth. Some joke that the “E” in ESG actually means “everything.”

Shift in Priorities Pressures the Executive Suite

This massive shift in investment and priorities puts new pressure on the executive suite and the boardroom. If we uncouple corporate governance from its traditional North Star—shareholder value—what then becomes the ultimate measure of success? How are leaders to balance across many possible priorities, including external agendas?

General counsel have an important role to play in navigating these new and confusing waters. They need to help clarify corporate imperatives for their CEOs and leadership team, taking in new direction while guarding against over-correction and the risk of diverting key resources from critical current programs and efforts.

Beware of Unintended Consequences

When I caution about the reach of the ESG movement, I am not saying that we should relieve all corporations of all responsibilities other than profit-making. After all, companies do not exist in a vacuum; they are part of the world we all live in.

I believe that most GCs, and most executives for that matter, accept that they have obligations that go beyond the share price. Personally, I believe deeply that purpose, values, and responsibility matter. I also believe that companies should be appropriately regulated for the industries they are in, follow the law, and not harm the communities they serve.

This is more a warning about the unintended consequences of moving too far, too fast, without a map. When you step back and see how far ESG has penetrated into our society and our markets, you realize that we are witnessing nothing less than a redefinition of the corporation itself. We are rejecting the old model—which happens to be the greatest wealth generating engine in history—and replacing it with something new, undefined, and unproven.

Many activist agendas are now being driven by socially motivated regulators, citizens, and shareholders, often pulling along historically passive institutional investors. When a shareholder tells you “I am not interested in your business or business model, I want to discuss diversity,” as I have witnessed, it makes you think. This new type of activism puts the emphasis on issues and matters that may be tangential to a company’s business model and value creation strategy.

The dynamic that GCs must guard against is one in which the company veers from issue to issue, influenced by whichever is the loudest activist group at the moment. The necessary balance comes in assessing which outside agendas are most aligned to the company’s own innate values and strategic priorities.

Guarding Against a Dangerous Future

Remember, there are already serious checks on corporate behavior. Companies must follow the law. Public companies must follow Securities and Exchange Commission regulations. Regulators, watchdog groups, class action lawyers all live in this ecosystem. Companies must confront public opinion. Their boards have fiduciary duties of care and loyalty. Shareholders, of course, have always had the ultimate ability to communicate their disapproval: selling their stock.

Ultimately, corporations are not democratic institutions. They are not public trusts or NGOs. If we start treating them as if they were, and regulating or pressuring them to behave accordingly, we alter the market economy in ways we cannot fully predict.

The real question we are confronting is this: What does it mean when companies can be, in effect, taken over by small but vocal shareholder groups? The reality is that we do not have enough history or data to know. This is a living experiment that is unfolding in company after company, industry after industry.

The bottom line: We are changing the rules, both written and unwritten, that guide corporate behavior. We are doing it quickly and without a clear end goal, pushed forward by an unfocused but intense appetite for corporate reform. Who decides right and wrong in this new regime?

We are headed for a future where executives act increasingly like politicians, trying to read and react to shifting public opinion. Is this what we want?

General counsel should take the lead here. The goal should be to “do business the right way,” not to shackle our companies to the cultural and social winds of the moment.

Anyone who believes unreservedly in applying majority rule or loudest voice wins principles to corporate governance should take a look at how well our political system is working. We need to find a better way to balance social responsibility with corporate independence, or we will all pay the price.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Matthew K. Fawcett is senior vice president, general counsel, and secretary for NetApp. He is responsible for all legal affairs worldwide, including governance and securities law compliance, intellectual property matters, contracts, and mergers and acquisitions. Fawcett led the transformation of NetApp’s legal department into a globally-recognized, high-performance organization with a unique commitment to innovation and is a frequent speaker and author on the topics of innovation in the legal industry and leadership and management issues.