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August 15, 2022

Corporate Social Responsibility and Its Newest Version: ESG

To survive and to prosper, corporations need to focus on satisfying their customers and those to whom they have fiduciary and moral responsibilities.

By Dr. Mark W. Hendrickson

What is Corporate Social Responsibility (CSR)? Wikipedia defines CSR as “a form of … private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature.” That seems rather vague, even amorphous. As Wikipedia acknowledges, “A wide variety of definitions have been developed but with little consensus.”

Investopedia says that CSR “helps a company be socially accountable to itself, its stakeholders, and the public” and that CSR helps companies be aware of their impact “on all aspects of society, including economic, social, and environmental.” Once again, the very definition of CSR seems fuzzy, even amorphous.

The basic problem is that the concept of CSR is highly subjective. It all depends on what any particular advocate of CSR expects or wants corporations to do for the alleged betterment of society. What tends to distinguish the most vocal advocates of CSR is that they generally operate outside of the corporations that they are trying to influence. In fact, most of them have no experience at business. They prefer to tell businesses what they should do.

Traditionally, in our (mostly) free-market economic system, corporations have been deemed to have several sets of stakeholders — people with a direct connection to the activities of the corporation. These stakeholders include the corporation’s customers, its shareholders (owners), its employees, and its suppliers, distributors, lenders, etc.

CSR activists reject such a circumscribed, well-defined list of stakeholders. They argue that “society” itself is a stakeholder, and then they appoint themselves spokespersons for society, presuming to tell corporations how they should alter their business practices, revise their product lines, allocate their capital, and so on. If you agree with the political objectives of CSR activists, you might support the activists’ assertions that they are legitimate stakeholders in the corporation’s activities. If, on the other hand, it seems fishy to you that people who don’t own a business or work for that business should have as much or more say about corporate policies than the business’s shareholders, customers, and employees, then you would be inclined to view CSR activists as intrusive meddlers.

Activists play hardball. They often intimidate corporate leaders into making concessions using threats of bad publicity. One wonders, in these cases, where the legal line between free speech and extortion lies. Clearly, outside activists have little respect for the property rights of the legal owners of the corporation when they attempt to hijack a corporation to promote their favored political goals.

The current guise adopted by the CSR folks is called ESG: Environmental, Social, Governance scores. ESG has become a blunt instrument used to raise the costs of targeted businesses and sometimes to steer capital away from them.

In the area of the environment, activists and elite money managers tend not to focus on pollution. Indeed, that would be mostly superfluous, given the strict environmental regulations with which American businesses must comply. Instead, their scoring system penalizes both businesses and state governments for the “sin” of using or developing fossil fuels. Thus, ESG scores give states such as West Virginia lower scores of creditworthiness, even though their finances are in order and their bond-ratings high. And companies that produce fossil fuels, or even those companies that deal with fossil-fuel companies, are given low scores designed to discourage anyone from lending capital to them. In other words, activists try to asphyxiate such companies by denying access to the financial oxygen of capital.

ESG is an even bigger farce when it claims to seek “social improvements.” Today, many American citizens are struggling under soaring gasoline prices and rising heating and cooling costs due to the anti-fossil fuel policies of the Biden administration and its ESG allies. Perversely, ESG activists use low social scores to hamstring the very companies that could produce the energy that Americans so desperately need. If anyone deserves low social scores, it would be the ESG advocates who are crippling the production of fossil fuels that Americans so badly need.

As for governance, pressures from the self-anointed ESG graders may cause corporate leaders to misgovern their companies to the detriment of shareholders, employees, and customers. Two prominent examples of the danger posed by ESG to sound corporate governance are last year’s decision by Major League Baseball Commissioner Rob Manfred to move the All-Star Game out of Atlanta (taking a partisan position on a Georgia election law and thereby alienating many fans) and this year’s fiasco at Disney.

The Disney CEO declared that his company opposed a new Florida law that prohibits the teaching of sexual identity to children before the fourth grade. Regardless of how one feels about a particular law, it is poor corporate governance for a corporation to take an official stance on contentious moral issues. Inevitably, some customers are on one side, others on the other side. The same with employees and shareholders. Consequently, every time corporate leaders take an official corporate position on some controversial issue, they foolishly and gratuitously alienate a significant percentage of their legitimate stakeholders. And for what? To placate outside activists who often have zero actual stake in the corporation. CEOs should no more declare that their corporations are on one side or the other of a political controversy than to say the company officially supports a specific church or political party. The wise and respectful approach is for the company to remain officially neutral while encouraging its stakeholders to follow their own conscience in deciding which laws and initiatives to support and whether to do so privately or publicly.

Bottom line: A corporation can’t be all things to all people. To survive and to prosper, corporations need to focus on satisfying their customers and those to whom they have fiduciary and moral responsibilities, i.e., their shareholders and employees. To get swept up in the latest CSR or ESG fad is bad business. By pursuing partisan political goals instead of traditional business goals, business leaders offend some consumers, demoralize or anger some employees, and poorly serve their shareholders. Since consumers, employees, and shareholders are the members of society that a business affects most directly, it follows that sacrificing their welfare in the name of certain activists’ cause hurts society. In practice, ESG can be very antisocial.

Dr. Mark W. Hendrickson is a retired adjunct faculty member, economist, and fellow for economic and social policy with the Institute for Faith and Freedom at Grove City College.

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