For years, the World Economic Forum, an unholy alliance of political leaders, corporate elites and wealthy aristocrats, has championed ESG, the “environmental, social, and governance” model of business administration, whose central premise is that private business should be compelled to achieve social good.
The agenda for this week’s WEF meeting in Davos is chock-a-block with ESG themes and messages, including that corporate leaders should use their companies’ resources to tackle the social and environmental issues of our time and change the way capitalism works. But the label “ESG” itself does not appear. Perhaps they are feeling a backlash, and for good reason. Also known as “stakeholder capitalism” and “corporate social responsibility,” ESG is a terrible idea that represents the end of apolitical commerce. ESG is corporate socialism.
According to Milton Friedman, there is one and only one social responsibility of business: to make money. Companies should use their resources and engage in activities to increase their profits so long as they stay “within the rules of the game, which is to say, engage in open and free competition without deception or fraud.”
But not under ESG. Its vision of social good is not neutral or benign but involves an ideological agenda focused on climate activism, critical race theory and central planning. ESG corporate governance demands that directors and officers act in the interests of a wide array of “stakeholders”: employees, creditors, suppliers and customers, but also environmental causes and social goals such as diversity, inclusion, and equity policies and quotas.
ESG undermines the duty of officers and directors to act in the best interests of the corporation, thereby empowering management at the expense of shareholders, creating an executive aristocracy. From the outside, ESG assesses corporate value by measuring commitment to political goals rather than profitability, thereby threatening companies that dissent from its mandates.
The legal fact is — still — that shareholders, not stakeholders, own the corporation while officers and directors run it. The relationship is like a trust. One group holds the beneficial interest in the property and the other controls it. Like trustees, officers and directors owe fiduciary duties and may not use the resources under their control for their own interests or purposes. In Canadian corporate law, directors and officers owe their duties to the corporation, which means they must seek to maximize its value, an objective that broadly reflects the interests of shareholders in generating a return on investment.
The primacy of the bottom line obviously does not prevent companies from treating employees, creditors, suppliers and customers fairly, from doing good deeds in the community or from complying with laws and regulations. Any action that enhances profits, such as generating community goodwill, keeping the workforce content, developing good relationships with suppliers and creditors and staying out of legal trouble, will be consistent with the duty. If consideration for employees, creditors, suppliers, customers, environmental causes and community interests is consistent with and enhances the company’s prospects, such as by attracting new customers through its good works, then no problem arises.
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But executives breach their duty if they pursue good deeds that conflict with the company’s financial interests. As the Supreme Court of Canada has put it, “(D)irectors owe their duty to the corporation, not to stakeholders… (T)he reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.” In other words, the fiduciary responsibility of officers and directors is ultimately to increase the corporation’s profits. Milton Friedman would approve.
But that is not how ESG works. Stakeholder governance dilutes directors’ and officers’ fiduciary duties and broadens their discretion. It provides executives with a mandate to put corporate assets towards political causes they deem important. It turns companies into social welfare institutions and gives business leaders licence to pursue “social good” at their own discretion — but with other peoples’ money. We should all, of course, contribute our own money towards whatever causes we please. But ESG in effect requires all shareholders to contribute to the chosen causes whether they approve or not.
As ESG reporting becomes standard, even increasingly mandatory, so must ideological compliance. Along with digital currency and digital identification, both currently in development, ESG fosters centralized, political supervision of the economy.
In embracing ESG, some business leaders no doubt believe they are doing good. They fail to grasp that ESG is a Trojan horse that undermines capitalism and their own free societies. Once a singular focus on making profits comes to be regarded as unacceptable, business decisions will no longer belong to companies to make on their own. Instead, the moral and political content of corporate actions will require technocratic supervision. Friedman wrote, “the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of government bureaucrats.”
The jet set at Davos are fond of lamenting what capitalism has done to the world. The rest of us should lament what ESG is doing to capitalism.
Bruce Pardy is executive director of Rights Probe, senior fellow with the Fraser Institute, and professor of law at Queen’s University. A longer version of this piece is published by the Fraser Institute.