M. Todd Henderson on the ESG Movement

Why It Is Risky to Have a Woke CEO

There is a movement afoot to make corporate America more woke. Known as ESG (environmental, social and governance), the idea is to pressure companies, through negative publicity, boycotts and investment choices, into being better citizens. Last year, the normally staid Business Roundtable issued a letter signed by 181 CEOs declaring that the purpose of a corporation is to serve all stakeholders—not just shareholders. One of the world's biggest money managers, Blackrock, issued a similar letter. Although serving communities, employees and the environment sounds great in theory, there is a tension at the heart of the ESG movement that should scare everyone about companies choosing to go down this road.

The problem stems from the attempt to broaden the appeal of ESG by including within its ambit the goals of promoting three things—the environment, society and good governance. If we add earning profits, corporate managers are supposed to maximize along four dimensions. This is an impossible task, since these things may often be in conflict with one another. Looking out for the environment might mean shuttering factories, which could devastate a local community. Putting workers' interests first might mean worse products for consumers. Instituting the best governance might mean no more corporate donations to local charities. Almost every action to please stakeholders reduces profits. No one can serve four masters simultaneously.

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