Stakeholder Doctrine Thrives Amid ESG Controversy: Texas Lawsuit and Corporate Trends
The debate over Environmental, Social, and Governance (ESG) principles has reached a boiling point, with a new lawsuit in Texas highlighting the ongoing clash between stakeholder and shareholder models. Despite fierce attacks on ESG from various quarters, the stakeholder doctrine continues to gain traction. Here’s an in-depth look at why this is happening and what it means for the future of corporate responsibility.
The Texas Lawsuit: A Case of Legal Ju-Jitsu
In recent weeks, a significant legal battle has unfolded in Texas. The American Sustainable Business Council (ASBC) is challenging the state’s 2021 and 2022 decisions to blacklist companies that embrace ESG strategies. This lawsuit isn’t just a legal skirmish; it’s a striking example of the broader conflict over corporate governance.
Key Points of the Lawsuit:
- Plaintiffs’ Argument: The anti-ESG movement is infringing on free speech by forcing financial support towards fossil fuels and away from sustainable practices.
- Defendants’ Justification: Texas politicians argue that these measures prevent ESG activists from imposing their views on others.
The lawsuit represents a clever twist on the concept of freedom, aiming to redefine how corporate actions are regulated and interpreted.
The Shifting Zeitgeist Around ESG
Five years ago, ESG was a buzzword symbolising a shift towards incorporating societal and environmental considerations into business models. This change was solidified when America’s Business Roundtable (BRT) in August 2019 called for a departure from the shareholder-first approach championed by economist Milton Friedman. Instead, they advocated for a “stakeholder” framework that balances profit with broader societal interests.
Historical Context:
- Business Roundtable’s Shift: Advocated for stakeholder-centric business models.
- Friedman’s Shareholder Model: Prioritised shareholder profit above all else.
However, the rise of ESG has not been without backlash. Critics, particularly from the political right, have labelled ESG as “woke capitalism,” associating it with progressive social agendas. As a result, many business leaders are distancing themselves from these terms to avoid becoming political targets.
The Anti-ESG Crusade: Complex and Multifaceted
The anti-ESG movement is not as straightforward as it might seem. On the surface, it appears to be a push to return to Friedman’s shareholder-centric model. Yet, there’s more nuance to it.
Insights into the Anti-ESG Movement:
- Explicit Calls for Shareholder-First Approach: Recently, 14 Republican state treasurers urged the BRT to abandon stakeholderism and return to maximising shareholder value.
- Current BRT Stance: Emphasises the importance of balancing profit with investment in workers, suppliers, and communities.
This complexity suggests that while some seek a return to traditional business models, others are redefining what stakeholderism means in today’s context.
The Role of Industrial Policy and Populist Economics
The evolving debate around ESG also intersects with broader themes of industrial policy and populist economics. Recent moves by the White House to block foreign takeovers and calls from political figures for businesses to focus on local communities reflect a growing emphasis on national interests.
Recent Developments:
- Industrial Policy: Example of blocking Nippon Steel’s takeover of US Steel.
- Populist Economics: Figures like J.D. Vance advocating for business support of local and national interests.
These shifts highlight how the principles of stakeholderism are being adapted and redefined in the current political and economic climate.
Changing Societal Attitudes Towards Business
Societal attitudes towards business have shifted significantly since Friedman’s era. In the past, solving societal issues was seen as a government responsibility. Today, with growing distrust in government and increased public scrutiny of corporate practices, there’s a higher expectation for businesses to take stands on social issues.
Key Trends:
- Public Trust: Only 40% of Americans trust government, compared to 53% who trust business.
- Consumer Expectations: 67% of consumers expect brands to take a stand on social issues, and 75% would leave a company over political disagreements.
These changes underscore why stakeholderism is becoming more entrenched as a cultural norm.
Corporate Leaders and Political Risk
Corporate leaders are increasingly aware that ignoring the social and political context in which they operate is risky. Over the past decade, significant business shocks have stemmed from factors beyond traditional financial metrics, including climate change, political instability, and social justice issues.
Survey Insights:
- EY Survey: Most business leaders expect more political risk in the future, with only 30% feeling prepared for it.
The growing awareness of these risks reinforces the importance of stakeholder considerations in business strategy.
Conclusion: The Resilience of Stakeholderism
Despite the challenges and controversies surrounding ESG, the stakeholder doctrine continues to thrive. This resilience is evident in the ongoing debates, legal battles, and shifting societal expectations. As the landscape of corporate responsibility evolves, the concept of stakeholderism is being redefined, reflecting new priorities and values in a rapidly changing world.
Key Takeaways:
- Legal Challenges: The Texas lawsuit highlights the complex interplay between ESG and free speech.
- Evolving Norms: Stakeholderism is adapting to new societal and political contexts.
- Corporate Strategy: Ignoring stakeholder concerns is increasingly risky for businesses.
As we move forward, it will be crucial to watch how these dynamics unfold and shape the future of corporate governance and societal impact.
