Doing Well By Doing Good
Y’all know corporations aren’t actually people, right? (Photo Archey.com)
With the 2010 Supreme Court decision in Citizens United vs. the Federal Elections Commission, US corporations achieved a status the founding fathers could never have imagined. The court determined, essentially, that since corporations had employees who were people, the companies themselves should be treated like people, entitled to free speech. In this case, the “speech” involved the ability to make nearly unlimited campaign contributions.
It was a stunning evolutionary mutation: call the new species homo corporatiens.
At the time of the decision, people on the right (generally) celebrated, under the belief that corporate contributions would flow disproportionately to candidates the right supported. People on the left (generally) howled. They argued that corporations aren’t people – why not let the real people who work for them make their own individual decisions to make campaign contributions?
These days, the new species is speaking in a different way. More and more corporations are making public statements about their “corporate social responsibility” (CSR) and measuring progress in improving performance in a wide variety of areas related to their environmental, social and governance behavior (ESG).
This time people on the left are (generally) celebrating: ESG metrics tend to address issues like reducing environmental impact, supporting greater workplace equity, even supporting reproductive health. People on right are (generally) howling. They argue that corporations aren’t people – why not let the real people who work for them make their own individual decisions about moral and social issues?
As CSR/ESG efforts have grown over the past few years, some US governors have denounced them; a few corporate leaders have vilified them (Elon Musk calls ESG “satanic”). Some states have taken steps to punish them (18 states have refused to invest pension money in funds like Blackrock, Vanguard and others that support ESG); Texas is encouraging anti-ESG funds to form and is refusing to let banks that support ESG (J.P. Morgan, Goldman Sachs and Bank of America and others) underwrite municipal bonds in the state.
So, to summarize, the left hated the idea of corporations as people in 2010; the right hates the idea in 2024.
And they were both correct: corporations aren’t people. They* exist for a single purpose – to maximize shareholder value, which generally means making money. Since at least the 1970’s, every business school has been teaching this; every person in the C-suite understands this.
A brief from Temple Law School takes this one step further: “Even apparently selfless corporate acts, such as charitable donations, are justified as ultimately benefiting shareholders by producing a favorable image and so customer goodwill.”
That may sound cynical, but it works. I first fully appreciated this in the mid-1990’s, when I was working for the governor of North Carolina, and across the country, states were under pressure to “end welfare as we know it.” The governor had announced a plan to time-limit welfare benefits, but we had no plan for what would happen with the people (overwhelmingly women, all with dependent children) who lost their benefits: most had little education and past job experience. My idea was to approach business leaders who were likely to hire folks with lower education levels and ask them to make public pledges to hire the women for at least six months, with benefits. Pledgers would then join a governor’s “business council” and encourage their peers to make similar pledges.
The idea took off, but not for the reasons you might imagine. Company after company stepped forward to make their commitments, proclaiming they were doing it because of their deep commitment to the people of North Carolina. Behind the scenes, though, our conversations focused on the tax credits they would receive, their difficulty finding workers (at the time unemployment was very low) and, sometimes, the face time they would get with the governor.
The pledges also built really valuable reputational capital for the companies.
I have no doubt that the CEO’s cared about the state and thought that this was the “right” thing to do, but it is also undeniably true that the corporations did it because it benefited their shareholders.
The same is true with CSR/ESG commitments. When corporations develop these plans, it might or might not be the case that corporate leaders care about the commitment the company is making, but it is always the case that the corporation is doing what it believes will increase the value of the organization.
And they are right. A comprehensive review of more than 2200 corporate ESG efforts by the Journal of Sustainable Finance and Investment found that 63% resulted in greater return on equity and just 8% showed negative returns; the remainder were neutral.
Studies find that going green, supporting some social causes and good governance can all help a company’s bottom line. (Getty Images)
A McKinsey study cited several reasons why ESG efforts, taken seriously, result in greater returns. Here’s a summary of the McKinsey argument, with a couple of additions from me:
· ESG commitments send important signals to the public, government and customers: Strong statements on ESG may help reassure state and local officials that a company will act with goodwill when it comes to employment, pollution or other factors. And, while the percentages vary by industry, McKinsey reports that, overall, about 70% of customers say they would pay an extra 5% for a “green” product that works as well as a nongreen product. Kiplinger reports that 85% of investors are interested in financial products that invest in ESG.
· They reduce some costs: McKinsey found that companies with ESG strategies reduced near and long-term costs by using raw materials and energy more efficiently. In the long term, being more careful with things like waste disposal prevents potentially expensive cleanup efforts. The report does not address near-term higher costs of energy from green sources.
· They lower regulatory challenges: State regulations in some industries can cost a company up to one-third of its profits. Companies that proactively address areas that could lead to potential increased government regulation not only avoid those extra costs; they also may receive government subsidies.
· They inspire employees: a study of companies ranked in Fortune Magazine’s “100 Best Places to Work” finds that those companies generate between 2.3% and 3.8% greater stock returns per year over a 26-year period. Other studies show that employees have higher job satisfaction if they think their employer “gives back.” By contrast, companies with weak ESG propositions face reduced employee productivity.
Companies are making commitments, then, not out of a sense of Corporate Social Responsibility, but because they have a Corporate Social Strategy, and for the same strategic reasons it made sense for those CEO’s in the 1990’s to pledge to hire women transitioning off of public assistance. ESG pledges will probably save companies some money; they may open some new markets to the companies; they could reduce long-term regulatory headaches. They will also generate a positive image for the company with shareholders, customers and employees.
But any moral calculation in these efforts is only incidental — if the costs of doing ESG begin to outweigh the benefits, companies will stop doing it.
When I was in school I remember being challenged by the philosophy of Baruch Spinoza, who famously argued that people act only in their self-interest, that even when we act in ways that appear to be altruistic we do so because we think people will admire us. I was never comfortable with that: I like to think we homo sapiens have in us something more deeply moral than self-interest. But not homo corporatiens. They’re not actually people.
-Leslie
*In this piece, I am talking about traditional for-profit entities. Nonprofit corporations and B Corps have different missions.
Notes:
Review of articles analyzing impact of ESG on equity returns: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2699610
McKinsey on ROI of ESG: https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx
Interest in investment in companies using ESG principles: https://esgtruths.com
Temple article on purpose of corporations: https://www2.law.temple.edu/10q/purpose-corporation-brief-history/#:~:text=Today%2C%20the%20standard%20answer%20is,charitable%20donations%2C%20are%20justified%20as