Journal of Applied Corporate Finance最新文献

ESG is under attack from all sides. Opponents object to the incorporation of environmental, social, and governance (“ESG”) issues in investment decisions, arguing that it allows fund managers to pursue their own agendas at the expense of client returns. Proposed solutions range from disinvesting from ESG funds to banning ESG outright. In January 2024, Republican lawmakers in New Hampshire introduced a bill to prohibit the state from investing in funds that consider ESG factors; violation would be a felony punishable by up to 20 years in prison.

Supporters range from true believers, who view ESG as a sure-fire way to achieve both financial returns and social impact, to opportunists who saw ESG – at least historically – as a means to exploit a bubble. Asset managers launched ESG funds; companies courted capital, customers, and colleagues by touting their ESG credentials; and authors, influencers, and professors reinvented themselves as ESG experts even if they never previously cared for the topic. But both true believers and opportunists are recognizing the shifting sands – the former are ploughing ahead but calling it something different; the latter are reversing course and looking for the next fad. In June 2023, BlackRock's Larry Fink, a previously outspoken ESG supporter, announced that he'd no longer use the ESG term because it had become “weaponized,” but not change his actual stance. A January 2024 Financial Times article noted that just six funds citing ESG factors launched in the second half of 2023, as compared with 55 in the first half.1 On the same day, the Wall Street Journal dubbed ESG “the latest dirty word in Corporate America.”2

Alongside the true believers and opportunists lies a third group of supporters. They believe that the practice of integrating some – but not all – ESG factors, can create value, but the term “ESG” has several problems. In a 2023 article entitled “The End of ESG,” I argued that ESG is “extremely important” because it is critical to long-term value and thus should be of interest to anyone, but the term “ESG” implies that it's niche. I also claimed that it is “nothing special” compared to other intangible assets such as productivity, innovation, and culture, but the term “ESG” puts it on a pedestal.3 This is far more than a semantic issue since the term ends up affecting the practice; the “incorporation” of environmental, social, and governance factors sometimes morphs into their “prioritization” or “exclusive consideration.” Some companies allocate capital to initiatives that can be labelled ESG over those that might create more long-term value, or make misguided decisions designed to improve ESG metrics even when they are not material to the business. Some investors buy a stock that satisfies ESG criteria with little regard for its price, or automatically vote against the appointment of a new director if it does not achieve their board diversity target, irrespective

Recent years have witnessed an explosion in the attention paid to the notion of corporate social responsibility (CSR), the idea that corporations have an obligation to consider the impact of their decisions on a broad set of stakeholders that extends well beyond their investors. Such social concerns are by no means new; they were matters for corporate boardroom and top management discussions long before Milton Friedman published his famous editorial on the social responsibility of business.1 Nonetheless, for at least the past decade and since the passing of the Global Financial Crisis, CSR advocates have more vigorously pursued their mission of incorporating social concerns within the purview of corporate decision-making.

But why so much corporate attention to social matters now? Three possibilities come to mind. First, the urgency of social concerns and the perceived ability of and expectation that corporations will do something about them have increased over time as public companies have become steadily larger and their reach more global. Climate change is the prototype of a social issue whose urgency and scope continue to grow over time. Second is the possibility that, although the social concerns themselves have not changed much over time, individual preferences have changed and various stakeholders have become more sensitive to those concerns than before. A third possibility is that, although social concerns tend to arise from negative “externalities” that most economists assume are best managed through government regulation, growing or widespread skepticism about the ability of government institutions to address these concerns in cost-effective ways could lead to increased demand for corporate investment in addressing social challenges.

Regardless of the reason for the increased attention to CSR, it is almost invariably accompanied by calls for rethinking the idea of shareholder primacy in the corporate objective function. In this article, I address the question of whether the increased focus on CSR requires a paradigm shift away from the traditional shareholder primacy model toward one that gives more voice to stakeholders. My short answer to this question is no, and for three main reasons:

First, the increased focus on CSR has virtually nothing to do with the factors that led to the establishment of shareholder primacy as the dominant paradigm. The theory of shareholder primacy which is a cornerstone of modern corporate finance arose as an efficient solution to “contracting” problems faced by corporations that have a diverse set of stakeholders, each of which often has different preferences about what and how certain corporate decisions get made.2 Such contracting problems—which have long been, and will always be, with us—are likely to become even more intractable with the rising demand for CSR. Which leads to the suggestion: if we thought that shareholder primacy was part of an efficient organizational structure befo

In 2022, ShareAction, a well-known British activist responsible investment NGO, tabled a resolution at Sainsbury's one of the UK's largest supermarket chains, demanding that they become an accredited Living Wage employer. I wrote up the case in this journal a year ago in an article titled: “Lessons for ESG Activists: The Case of Sainsbury's and the Living Wage.” 1 That proposal was rejected by around five out of every six shareholders at the 2022 Sainsbury's AGM.

So, I was interested to see the investor response to a similar proposal making a similar demand filed by John Chevedden at the 2024 AGM of Walgreens Boots Alliance (WBA).2 The filing was supported by The Shareholder Commons and ShareAction. Were any of my lessons for ESG activists learned? And what should we make of the case made by the proposers?

On the face of it, this resolution turned out to be even less persuasive than the ShareAction proposal at Sainsbury's: fewer than one in ten of WBA's investors supported it.3 Set against this is the fact that ESG proposals have always tended to receive less support at US than European companies, and over the last 2 years even more so. So perhaps the support can be considered comparable, all things considered.

Did the proposal reflect any of the lessons that I proposed we learn from the Sainsbury's proposal? Were shareholders right to reject it? I will argue that the answers are “yes, at least in part,” to the first question—and “yes, though with regrets,” to the second.

How did the WBA proposal stack up against these?

The Business Case Needs to be Compelling and Made with Precision and Care. Two years ago, I was quite critical of the business case put forward by ShareAction to support their proposal. It was very much framed in terms of the benefits to Sainsbury's of paying a living wage, but without compelling evidence to support the case. Indeed, most of the evidence ShareAction cited either was not applicable to the situation or even undermined its own case.4 They failed to demonstrate that paying higher wages than necessary in a competitive low margin business would help Sainsbury's be more successful.

There are theoretical reasons why higher wages can be more than offset by increased productivity, but it is not an automatic result, and the win-win scenario can be quite difficult to pull off. It is not clear that shareholders are better placed than company management to decide whether this can be done in the specific circumstances faced by the company. Indeed, if improving shareholder value was as easy as increasing wages, we would expect more management teams in the retail sector to follow this path, whereas only a small minority do.5

This line of argument is notably different from that set out in the Sainsbury's proposal. The proposers are explicitly acknowledging and accepting the possibility that paying living wages might damage WBA's financial returns. Their innovation is to con