Corporate directors may feel like mediators at a rock fight, as antagonists that are for or against the “environmental, social and governance (ESG)” movement duke it out.  The rock fight has arisen due to extremism over ESG.  As proponents and opponents fight to a standoff or stalemate, boards can mediate by embracing neither side but instead appreciate that certain legitimate strands underlying the original formulations of ESG are consistent with traditional fiduciary duties and corporate purpose.

The principles underlying ESG’s original architecture when outlined by the United Nations in 2005 were neither new nor radical.  They were rooted in old fashioned notions of long-term focus, concern for constituents, and accountable managers, recognizing the value of capitalism to improve lives, create prosperity and produce ways to protect and create opportunities for all. These principles have guided some of America’s most successful and admired businesses for decades, from Henry Heinz to Warren Buffett, who have followed Ben Franklin’s advice to “do well by doing good.”

However, in recent years, some activists seized upon ESG to advance certain ideological beliefs and agendas.  Some interpretations of ESG that go beyond its original scope provoked equal and opposite political backlash.  The rock fight threatens boardrooms as antagonists on both sides use various tactics, such as shareholder resolutions, proxy voting, divestment, boycotts, lawsuits, and media campaigns, to pressure companies to adopt their views or face reputational and financial consequences. 

Companies face conflicting expectations to speak out on or stay out of controversial matters of the day as well as to support or reject efforts to measure and report on corporate initiatives from environmental conservation efforts to racial and gender practices.  This polarized debate is not only divisive and destructive, but also distracting and misleading. It obscures the genuine and legitimate benefits of longstanding ethical business practices, when applied sensibly and pragmatically, for both companies and society.  It also ignores the common ground on which so much of the debate over corporate purpose and socioeconomics has taken place for more than a century, reflecting a range of perspectives and priorities rather than rigid uniformity.

One way out of this political rock fight for boards is to stick with first principles, stressing that capitalism and shareholder value can be compatible with the principles the UN first used to support its ESG aspirations. This means that companies should, in accordance with governing law and applicable fiduciary duties of directors:

  • Seek to create value for shareholders, while also considering the interests of customers, employees, suppliers, and communities.
  • Manage the environmental and social aspects of their business as a matter of both compliance with law as well as a potential source of business advantage in its various markets.
  • Promote understandings among directors and officers as well as shareholders and other constituents of the corporate and policy stakes and trade-offs, including among time horizons and constituencies.

By adhering to first principles, companies can avoid the pitfalls of political polarization and ideological dogmatism, and instead embrace the potential of proven practices to create value for themselves and society. They can also demonstrate that they are not only doing well, but also doing good, in the spirit of Ben Franklin and the best of American business.

Critical readers may find this balancing prescription to be too abstract, especially those seeking specific practical guidance on how to implement the first principles in their own contexts and situations.  But how a company and board should respond to a shareholder proposal, consumer boycott, or employee work stoppage will necessarily vary with the circumstances. The key is to avoid succumbing to the illusion of needing to take sides—boards must act in the best interests of their company and its shareholders, not be “aligned” with activists or critics on either side of opposing political positions. 

Skeptical readers may see the thesis as too optimistic.  To be sure, boards will confront obstacles, risks, and trade-offs when seeking to focus on first principles, but the alternative poses the greater danger.