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Commentary: Corporations Embracing ESG Must Lose Their Legal Protection

Commentary by Bruce Abramson originally published by RealClearPolicy and RealClearWire

ESG, an acronym for Environmental, Social, and Governance, is everywhere. If you work for, advise, invest in, regulate, study, or otherwise care about one or more corporations, you’ve likely encountered the term. Consultancies, banks, investment funds, managers, governments, and international organizations trip over themselves touting their ESG scores and credentials.

So what is ESG, and why should we care?

Though the term calls for incorporating concern with global warming (“E”), systemic racism (“S”), and other “woke” priorities into corporate governance (“G”), specifics can be elusive. The basic effect, however, is clear. ESG’s redefinition of “the corporation” threatens to undermine the stock market, the global economy, and large swathes of American law.

Its radicalism is hardly coincidental. ESG is an outgrowth of “stakeholder capitalism,” a theory first forwarded decades ago as an alternative to “shareholder capitalism.” Its earliest advocates thought that corporations whose sole purpose is to serve their owners—or shareholders—are cold and uncaring. Shouldn’t corporations also care about their employees, customers, neighbors, and all others whose lives they touch?

Under stakeholder capitalism, those people would gain a say over corporate decision-making. Under ESG, if all human activity affects problems like climate change and systemic racism, then all corporate decisions should incorporate such concerns. Corporations operating under this stakeholder model are thus a different species from the familiar shareholder corporation.

But corporations don’t exist in nature, and they don’t evolve. They’re legal constructs, subject to certain assumptions and constraints. Their legal and financial treatment is designed to make sense given the consequent model of corporate behavior. Alter the conceptual model of the corporation, and the bases of both corporate law and corporate finance collapse.

Shareholder corporations answer to a single moral imperative: maximize shareholder value. Whether you like the implicit morality or not, the behavior of entities following a single rule is predictable. Every existing element of both corporate law and corporate finance assumes that corporations are predictable profit-maximizers.

Stakeholder corporations undermine that assumption. Though stakeholder corporations can return value to shareholders, any corporation claiming proudly to consider multiple potentially conflicting tradeoffs cannot be assumed to work toward maximizing shareholder value. Stakeholder corporations are more complex entities than shareholder corporations—requiring corresponding complexity in their legal and financial treatment.

The World Economic Forum’s Klaus Schwab, arguably the most influential and prominent advocate of the ESG movement, was an early champion of stakeholder capitalism. In his recent Great Reset and Great Narrative books, Schwab shows how the stakeholder model, filtered through ESG, will centralize decision-making authority among a small cadre of corporate leaders and government bureaucrats—who, unencumbered by annoying shareholders or voters, will be free to focus on the common good.

For those of us who wish to prevent ESG’s takeover of the corporate landscape, corporate law offers a promising avenue of counterattack. The predictability of shareholder corporations earned them a simplified legal treatment subject to many helpful presumptions. Proud of their “evolved” ethical codes, stakeholder corporations have announced that such presumptions are misplaced.

Fair enough. Let the law take them at their word. Litigation and legislation must sever the legal treatment of stakeholder corporations from that of shareholder corporations.

Perhaps the cleanest—and potentially the most consequential—place to start is the Business Judgment Rule. This legal presumption allows every corporate defendant to arrive in the courtroom asserting that its decisions—including those that prove disastrous for shareholders—were made in the service of maximizing shareholder value. Plaintiffs—whether employees, shareholders, or business partners—complaining about corporate actions that failed to deliver bear the burden of proving bad faith, rather than mere errors in judgment.

The Business Judgment Rule makes sense when applied to shareholder corporations—but not to stakeholder corporations. Any corporation with an ESG statement has explicitly proclaimed that it will subvert some shareholder interests in favor of pressing environmental or social concerns.

The campaign to restore shareholder capitalism would snowball from there. Stakeholder corporations shorn of such legal benefits would sue the lawyers and consultants who guided them away from the legally beneficial shareholder model towards ESG—assuming only that even the most woke American corporations still value their own corporate interests. The legal and consulting classes will get the message.

ESG will persist as long as corporate leaders view it as cheap virtue signaling, would-be overlords see it as a path to power, and lawyers and consultants can milk it for revenues. The best way to defeat ESG is to rely on the same self-interest driving its current embrace: if the costs of ESG become exorbitant and obvious, the entire edifice will fall.

Like all utopian schemes, ESG is an attack on global freedom and prosperity. If you’re really dedicated to improving the lives of all stakeholders, you should work for an end to ESG.

Bruce Abramson, PhD, JD, is the author of five books, most recently “The New Civil War: Exposing Elites, Fighting Utopian Leftism, and Restoring America” (RealClear Publishing, 2021). He is president of the strategic consultancy Informationism, Inc. and a director of the American Center for Education and Knowledge.

This article was originally published by RealClearPolicy and made available via RealClearWire.

Deneen Borelli

Deneen Borelli is the author of Blacklash: How Obama and the Left are Driving Americans to the Government Plantation. Deneen is a contributor with Newsmax Broadcasting. She is a former Fox News contributor and has appeared regularly on “Hannity,” “Fox & Friends,” “Your World with Neil Cavuto,” and “America’s Newsroom.” She has also appeared on Fox Business Network programs “Making Money with Charles Payne,” “The Evening Edit with Liz MacDonald,” and “Cavuto: Coast to Coast.” Previously, Deneen appeared on MSNBC, CNN, the BBC and C-SPAN. In addition to television, Deneen co-hosted radio programs on the SiriusXM Patriot channel with her husband Tom. Recently, Deneen co-hosted the Reigniting Liberty podcast with Tom. Deneen is a frequent speaker at political events, including the FreedomWorks 9.12.2009 March on D.C. which drew a crowd estimated at over 800,000 people. Deneen is also an Ambassador with, a social media platform that promotes free speech, and with the America First Policy Institute (AFPI) which advances policies that put Americans first. Deneen testified before the U.S. House of Representatives Committee on Natural Resources in May 2011 and before the Ohio House Public Utilities Committee in December 2011. Previously, Deneen was a host, Outreach Director with overseeing its outreach program, a Project 21 Senior Fellow, and Manager of Media Relations with the Congress of Racial Equality (CORE). Prior to joining CORE, Deneen worked at Philip Morris USA for 20 years. During her corporate career at Philip Morris she worked in various positions, her last as Project Management Coordinator in the Information Management department where she was responsible for the department’s mandated quality processes, communications, sales information and database management. Deneen began her Philip Morris career as a secretary and advanced to positions of increasing responsibilities. Deneen worked full-time and attended classes at night for 11 years to earn her B.A. in Managerial Marketing from Pace University, New York City. Deneen served on the Board of Trustees with The Opportunity Charter School in Harlem, New York. She appeared in educational videos for children, worked as a runway fashion model, and auditioned for television commercials. Her interests include ancient history, pistol target shooting, photography, and volunteering at her church. Deneen currently resides in Connecticut with her husband Tom.

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