The hardest things to see are often right in front of you. This is the case with respect to the radical redirection of corporate governance under way in the United States borne of the reality that ordinary people, not faceless financial firms or Wall Street titans, actually own Corporate America.
At its core, this raises the most basic corporate governance question: what is a company’s purpose? Debate over this culminated in the stakeholder capitalism notion pronounced by the Business Roundtable and signed onto by almost 200 public company CEOs shortly before the pandemic, which rejected the shareholder primacy theory, long the foundation of corporate governance. Special interest groups, emboldened by breathless media coverage and the last administration’s calls to end shareholder capitalism, elevated ESG over financial interests in assessing corporate performance, a step further than the Business Roundtable took.
Money management firms quickly formed ESG-focused funds that poured money into seemingly countless “green” start ups and sided with social purpose proxy proponents and shareholder activists on most issues. For their part, the proxy advisory firms began grading directors based on climate impact and other ESG topics instead of the financial performance of their companies. Not surprisingly, companies, especially big ones, raced to be out front on these issues.
