Columbia Law School
Sky Blog
The standard explanation for the division along party lines on the role of ESG in corporate governance is this: Liberals think ESG factors are important in investment and business decisions. Conservatives think ESG is a harmful distraction, presumably because corporate managers should maximize profits and not consider anything else.
There is some truth to this explanation. Florida, for example, passed a bill requiring managers of state pension funds to consider only “pecuniary factors” in making investment decisions,[1] a swipe at ESG factors in portfolio management. Attorneys general from 21 states in 2023 sent a letter to proxy advisers saying they were in violation of state law when considering ESG factors pertaining to climate change in making recommendations for proxy voting of shares held by state pension funds.[2]
Many ESG initiatives are from the left. For example, in 2018, Massachusetts Senator Elizabeth Warren introduced the Accountable Capitalism Act[3] a bill that would require America’s largest corporations to have a stated corporate purpose that includes benefiting the public as well as earning profits for shareholders. Senator Warren has not re-introduced the Accountable Capitalism Act in the current Congress, and perhaps there is little hope of getting such a bill past the Republican controlled House of Representatives.
Political alignment on ESG, however, is not that simple. Conservative politicians, including Florida Senator Marco Rubio, are fed up with profit maximizing corporations, attacking, for example, Amazon for its mistreatment of its workers.[4] And Florida Governor DeSantis himself spent years trying to destroy the profitability of Disney Corporation, the state’s largest private sector employer in a feud over social issues.[5] Desantis’ views on social issues are different from the views of his progressive ESG counterparts, but he clearly has an ESG agenda of his own.
In a recent article, I argued that Republicans could be as enthusiastic about ESG as Democrats, and that the ESG framework can advance within corporate governance the issues that conservative voters care about. This raises the possibility that Congress could enact a bipartisan bill that at least allows, and perhaps requires, directors of publicly traded companies to consider ESG factors as well as profits in corporate governance. To sustain bipartisan support, the bill would need to include ESG factors from different parts of the political spectrum and allow corporate directors discretion to decide for themselves which ESG factors are important to them and how much weight to give to each. The only mandate would be that directors at least include ESG factors in corporate governance. This would reduce the threat of shareholder lawsuits premised solely on allegations that directors gave insufficient attention to profits. The bipartisan ESG bill (perhaps a Warren-Rubio bill) would not advance any one ESG agenda, left or right, but would reinforce the view that corporate governance is not just about shareholder primacy, and that directors should seriously consider how business operations affect the world around them.
A few examples follow.
First, consider China. What about a bill in Congress that required corporate officers and directors of publicly traded companies to consider the threat to U.S. national security before investing in China? Even though such a law would intrude on corporate governance, which is usually the province of the states, conservatives might still support it. Direct regulatory restrictions on trade with China could also work, but conservatives often are loath to support inflexible regulation of business, even business with China. In the China trade context, conservatives might want directors to have some discretion, at least a clearly defined right to use their own “business judgment” in such matters. But conservatives also could support saying that directors are expected to use that discretion to consider national security, not just corporate profits. Failure adequately to consider national security would not be a violation, particularly if the directors gave at least some weight to national security concerns, but at the same time shareholders could not reasonably complain that directors improperly sacrificed profits to protect national security. Directors would get to decide.
So also, but in the opposite direction, with Israel. Israel labors at a significant disadvantage when trying to appeal to profit maximizing multinational corporations – lack of natural resources, no plentiful supply of cheap labor, and war are all disadvantages weighing heavily against the advantages of Israel’s highly educated workforce and democratic institutions. Corporations doing business in Israel are increasingly subjected to economic boycotts at home and abroad. In the current environment, the profit maximizing corporation may choose to stay away, or even quietly reduce involvement with Israel, caving in to global boycotts without admitting that it is doing so.[6]
Congress has prohibited boycotts,[7] and conservatives have urged that Congress do so even more strongly.[8] Congress, however, cannot mandate that corporations do business with Israel or prevent them from pulling out “for other reasons.” Corporate directors nonetheless could stand by their commitments to Israel because they believe it is the right thing to do. At a minimum, they should be permitted to do so without exposure to shareholder suits claiming they sacrificed corporate profits for a “political” purpose.
A pro-Israel perspective on ESG would support management in maintaining or even expanding business with Israel. Investors who care only about profits will take their money elsewhere. Although loyalty to Israel might decrease profits and increase the corporation’s cost of capital in the short term, the reputational value of standing by Israel will have economic and noneconomic advantages in the long run. The long-term economic benefits of pro-Israel ESG may be too speculative for directors and officers concerned only with profits, but a broader vision of corporate purpose clearly allows it.
Next, some ESG minded conservatives embrace the faith-based business model – for example Chick fil-A’s decision to close on Sundays. Should minority shareholders have a right to complain about lost profits? Or should they, like the minority shareholders in the Chicago Cubs who unsuccessfully complained about refusal to play night baseball in Schlensky v. Wrigley,[9] submit to the judgment of controlling shareholders who consider factors other than profits? The profit maximizing “shareholder primacy” theorist might insist all such considerations be tied to profits, but the ESG advocate, and the faith-based business manager, will point to an end more important than profits.
Then there was the hard-fought battle in the Supreme Court for Hobby Lobby – for reasons having nothing to do with profits – to be permitted not to offer employees health insurance covering birth control. The Supreme Court in Burwell v. Hobby Lobby Stores ruled that federal law could not require a business to offer health insurance that includes birth control against the religious objections of controlling shareholders. The Court expressly observed that corporations have a purpose other than just making money:
Hobby Lobby’s statement of purpose commits the Greens to “[h]onoring the Lord in all [they] do by operating the company in a manner consistent with Biblical principles.” Each family member has signed a pledge to run the businesses in accordance with the family’s religious beliefs and to use the family assets to support Christian ministries. In accordance with those commitments, Hobby Lobby and Mardel stores close on Sundays, even though the Greens calculate that they lose millions in sales annually by doing so. The businesses refuse to engage in profitable transactions that facilitate or promote alcohol use; they contribute profits to Christian missionaries and ministries; and they buy hundreds of full-page newspaper ads inviting people to “know Jesus as Lord and Savior.”[10]
Not that much different from these examples of conservative ESG proponents are the more progressive ESG proponents who prioritize other causes. Indeed, with an increasing number of evangelical Christians taking up the cause of climate change,[11] there may be overlap between the two groups.
And this brings us to the possibility of a bipartisan consensus supporting a legal regime that allows,[12] and perhaps requires, corporate directors to consider the public welfare, embodied in ESG goals of their own choosing, not dictated by the government. Shareholders who disagree with these goals, or who want directors who only seek profits, can vote their shares accordingly or divest and take their money elsewhere.
ENDNOTES
[1] See Laws of Florida, Ch. 2023-28 (2023) (Government and Corporate Activism) http://laws.flrules.org/2023/28
[2] See Letter dated January 17, 2023, from 21 state attorneys general to Institutional Shareholder Services, Inc. and Glass, Lewis and Co. https://attorneygeneral.utah.gov/wp-content/uploads/2023/01/2023-01-17-Utah-Texas-Letter-to-Glass-Lewis-ISS.pdf
[3] See A Bill To establish the obligations of certain large business entities in the United States and for other purposes, 115thCongress, 2nd Session (introduced in the U.S. Senate by Elizabeth Warren of Massachusetts) ACCOUNTABLE CAPITALISM ACT, S. 3348, 115th Cong. (2018). https://www.warren.senate.gov/imo/media/doc/Accountable%20Capitalism%20Act.pdf
[4] See, Marco Rubio, Amazon should face unionization drive without Republican support, Op-Ed, USA Today, March 12, 2021, (“For the past several years, Amazon has waged a war against working-class values. …. the days of conservatives being taken for granted by the business community are over. Here’s my standard: When the conflict is between working Americans and a company whose leadership has decided to wage culture war against working-class values, the choice is easy — I support the workers. And that’s why I stand with those at Amazon’s Bessemer warehouse today.”) https://www.usatoday.com/story/opinion/2021/03/12/amazon-union-not-helping-working-class-economy-column/6947823002/.
[5] Florida Gov. DeSantis said he may put a prison next to Disney parks amid dispute, NPR, April 18, 2023,https://www.npr.org/2023/04/18/1170709950/florida-gov-desantis-said-he-may-put-a-prison-next-to-disney-parks-amid-dispute
[6] General Mills just happened to decide for “other reasons” to sell its operations in the West Bank.
[7] 1977 amendments to the Export Administration Act of 1969 prohibited U.S. individuals and corporations from taking actions to further a foreign boycott not sanctioned by the U.S. government. These amendments were later incorporated into Section 8 of the Export Administration Act of 1979.
[8] See e.g. The Israel Anti-Boycott Act. H.R. 1697 and S. 720; Combating BDS Act (S. 1) (116’th Cong.) intended to counter the BDS movement (co-sponsored by Senator Marco Rubio)
[9] 237 N.E. 2d 776 (Ill. App. 1968).
[10] 573 U.S. 682, 703 (2014) (internal quotation marks omitted).
[11] See Mark Silk, Evangelicals are Losing their Climate Skepticism, Religion News Service, April 28, 2021 (“In 2014, Pew reported that just 28% of white evangelicals attributed global warming to human activity. Last October [2020], by contrast, 44% of them said climate change was due “mostly to human activities,” according to a Climate Nexus poll.”) https://religionnews.com/2021/04/28/evangelicals-are-losing-their-climate-skepticism/
[12] As explained in more detail in the article, traditional corporate law for the most part allows corporate directors to consider priorities other than just shareholder wealth maximization, although there is reason to be concerned about a trend toward shareholder primacy in Delaware. See The Conservative Case for ESG, supra, discussing E-Bay v. Newmark, 16 A.3d 1 (Del. Ch. 2010).
This post comes to us from Professor Richard W. Painter at the University of Minnesota Law School. It is based on his recent article, “The Conservative Case for ESG,” available here.