To whom are corporations accountable? For most of our history, the answer was straightforward. Legally, corporations were accountable to ownership—that is, corporate officers had a fiduciary obligation to strive to earn profits for corporate shareholders. Economically, corporations were (and remain) accountable to their customers—that is, they need to serve customers well by providing good value to them or else lose revenue and go broke. Morally and prudently, they were and are accountable to their employees—that is, pay them and treat them sufficiently well to retain the personnel and skillsets needed to produce and deliver the goods and services that the corporation provides.
In an economic system based on private property (i.e., “capitalism” or free enterprise) the consumer is sovereign. Corporations that successfully meet consumer demands profit and prosper. Corporations that fall short of this goal sustain losses and either shrink or go out of business. People with no business experience often assume that running a business and making money is easy. It’s not.
On the contrary, earning profits is extremely challenging. Consumers can be very fickle. Understandably, consumers (that’s you and I, folks) look for the best value for our dollars. That means that corporations are incentivized to find ways to trim their costs through increased efficiencies and to seek a competitive edge through improved quality and/or added features. Corporations constantly have to worry about losing market share to competitors and about consumer tastes changing and thereby rendering existing product lines passé or obsolete.
On top of having to continually win over consumers, corporations have to navigate heavy bureaucratic regulation, deal with currency monetary policy fluctuations, and cope with such unwelcome developments as supply-chain disruptions and rising costs of inputs.
Nowadays, corporations have to cope with an additional layer of challenges created by the Corporate Social Responsibility (CSR) movement. CSR involves various activists, elitists, and politicians asserting that corporations’ responsibilities extend beyond customers, shareholders, and employees to additional vaguely defined “stakeholders,” such as “society” and “community.” The current version of CSR is called ESG—Environmental, Social, Governance scores. ESG scores have proliferated in the last couple of years. This is unfortunate—first, because the scores are largely meaningless, and second, because various financial, academic, and governmental elitists use them to coerce businesses into making concessions to the political agenda of the elitists.
First, let’s debunk the scores themselves.
“E”: A corporation’s environmental score is superfluous. In the first place, the profit motive drives corporations to increase efficiencies and reduce waste; in the second, our country has strict anti-pollution laws and regulations that American corporations must comply with.
“S”: The social score implies that a corporation’s wellbeing conflicts with the overall society’s wellbeing. In fact, a successful, profitable corporation is, by its very success, a key contributor to society’s wellbeing. A successful business employs residents, who in turn are able to patronize local businesses. Businesses also expand a community’s tax base. I lived for a long time in a pleasant rural community that blocked businesses from entering the community in the name of preserving a bucolic past. The result was run-down roads, an inability to attract top teachers, and a slowly dying town center. It’s common sense that businesses comprise a crucial component of the economic lifeblood of a community. Where do cities grow? Where there are businesses. What explains the historic phenomenon of ghost towns? No viable businesses.
“G”: Governance is interpreted in several ways. Some corporate critics want to adjust the pay of corporate executives. That’s the business of the owners of the business (shareholders) not outsiders. Others say it’s about a corporation not discriminating in its hiring practices. That’s mostly a red herring. In our competitive marketplace, corporations have strong incentives to look beyond race, gender, etc., to find the most talented workforce. They can’t afford to discriminate (letting the competition hire the talent that you need is suicidal in business) nor can they afford to lose talent by rigidly adhering to the quotas that activists favor. Also, as is the case with the environmental score, anti-discrimination gambits are rather redundant, given that discrimination is largely illegal already.