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ESG – stretch narrative or corporate trope? 

24 August 2021

Here S7´s Veronica Lie reacts to the idea that businesses are not capable of escaping the shackles of shareholder primacy.

In this piece (´Business can stop the ESG backlash by proving it’s making a difference´, 23 August 2021), the FT´s Andrew Edgecliffe-Johnson argues that the lack of impact on ESG has provoked a loss of faith in the ability and willingness of businesses to deliver on these principles.

To substantiate, Edgecliff-Johnson refers to a study by two academics at Harvard, Lucian A. Bebchuk and Roberto Tallarita. In an August 2021 paper titled ´Will corporations deliver value to all stakeholders?´, Bebchuk and Tallarita take stock of progress made by the businesses who, in 2019 and with much congratulatory ado, signed up to the Business Roundtable´s Statement on the Purpose of a Corporation.

Their assessment is a downer. After reviewing a range of practices across the BRT signatories (among them compensation), the authors conclude that the statement ´was mostly for show and that...companies joining it did not intend or expect it to bring about any material changes in how they treat stakeholders.´


To sum up: the proof is not in the pudding.


Yet Bebchuk and Tallarita are not just interested in exposing hollow commitments. In another paper written in February 2020 (´The illusory promise of stakeholder governance´), they question whether we should even expect business to play a role beyond shareholder capitalism (what they call ´stakeholderism´ or ´stakeholder governance´). They question whether businesses are even capable of anything else. And they argue that demanding that businesses practise stakeholder governance – which one could say is the main object of the ESG agenda – could actually result in greater harm to stakeholders by distracting publics and policymakers from critical political, social and economic reforms.


I think the authors are right to point out the folly of relying overmuch on businesses to solve the range of ills we have imposed upon ourselves. But demanding more of business surely does not mean demanding less of government. We need strong, capable, imaginative, fair governments as much as we need strong, capable, imaginative, fair businesses and strong, capable, imaginative, fair societies. The stool has three legs, after all.


As I sit down to read the full papers, a few questions are top of mind:


1. Bebchuk and Tallarita seem to accept shareholder primacy as the one and only business commandment. And yet shareholder primacy is a relatively new concept (one debunked by one of its chief proponents Jack Welch, who famously called it the dumbest idea in the world). To me this suggests that businesses are in fact capable of operating within a different framework.


2. Are the authors extrapolating too much from the experience of more traditional American businesses? Though we have a way to go before the real job is done – where ´true´ ESG is the market standard and not just a reporting framework – I think we have built up evidence that it is possible to run a thriving business with solid shareholder AND stakeholder returns. If this progress is being dismissed, on what grounds?


3. The authors rightly point out that prevailing incentives, including pay, hold genuine stakeholder capitalism in check. But incentives can change and do change?

4. They seem to assume that stakeholder capitalism would reduce corporate accountability. Why does this need to be true? They would just be held accountable for other measures.


5. How do we ensure that this argument is not used to justify the resumption and/or continuation of shitty practices in the name of shareholder primacy – practices which include, by the way, lobbying to stop governments from solving problems that benefit shareholders?


6. What if, propelled by this argument, the pendulum swung back to the time when business was expected to create value only for its shareholders, regardless of externalities? What if we all gave up on the vision of a world in which businesses could be formidable market performers while helping society forward? And what if, in this alternative future, government didn´t rise to fill the leadership vacuum? Where does this leave us? (Eek.)


It is true that we shouldn´t tolerate empty promises, and that they can do more harm than good.


It is incontrovertible that publics should not swallow entirely theoretical targets and headline-friendly commitments without real-world changes in how businesses make their money.


We should tolerate neither vacuous PR nor straight-up hypocrisy. With civilisation-altering temperatures on the horizon and intolerable economic and social injustice in our midst, we don´t have time for this shit.


But it is also true that narratives are almost by definition aspirational – they need to stretch ahead of the current reality to make way for a new one to form. Otherwise there is no space for the new behaviours and systems needed to create the impact we are after.


Now, the narrative can´t hold that space forever. Action needs to close the gap, before the narrative moves on again. It´s an eternal dance, between vision and action, talk and walk.


The question is: where do we find ourselves now? Is ESG a meaningful stretch narrative or has it withered into a corporate trope, lacking the nourishment provided by action, impact and change?

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