WINDthe new bio-sports-business drama movie about the beginning of the relationship between basketball great Michael Jordan and Nike and the development of Air Jordan, of course there is attention from the reviewers.
The two most unlikely are Donald Boudreaux, professor of economics at George Mason University, and David Henderson, research fellow at Stanford University’s Hoover Institution and editor of the Concise Encyclopedia of Economics. And they prove that, while progressing in new directions is always admirable, it helps if you know what you’re talking about. Their attempt to frame the film as a lesson against companies and investors considering ESG—environmental, social, and governance factors—is embarrassingly bad.
As Nell Minow, a leading US expert on corporate governance who is not just a movie hound but has been a published reviewer for longer than I can remember, called it on Twitter“the craziest take on movies and #corpgov to date.”
Hard criticism, but if you’re going to put up with a line of argument, it’s probably justified. Using a movie as proof of an economic theory that has long contradicted the realities of actual business is the lesser of two problem categories.
Boudreaux and Henderson, in their opposition to considering environmental, social, and corporate governance factors in investment and business decisions, channel the spirit of the late economist Milton Friedman.
In 1970, half a dozen years before winning the Nobel Price, Friedman argued that the only social responsibility of a company is to increase shareholder value. He wasn’t the first to say it but the influence was huge.
Friedman wrote in the New York TimesNYT previously, “The whole rationale for allowing the corporate executive to be elected by stockholders is that the executive is an agent serving the interests of his principal. This rationale disappears when the corporate executive imposes a tax and spend the revenue for ‘social’ purposes.”
Boudreaux and Henderson expanded that to include environmental considerations and — this is a big headscratcher — apparently corporate governance as well. That last trio is critical to a strong investment culture and adequate protection of shareholders. But we are in the category.
The two authors argue that ESG investing creates confusion “not only about how best to pursue the company’s goals but what those goals are.” These are both mental breakdowns when viewed through the lenses of managing a company and investing in one.
First, the management aspect. If the sole purpose of a publicly held company is to maximize shareholder value, one must first ask, given the many different ways investors approach their investments, what “value” should come first? As a hypothetical example, you could have a corporate raider with a significant position in the shares of a company, looking to sell those pieces to generate a quick payout on one hand, and a large long-term investors who expect to hold companies for many years, looking to appreciate in value and cash flow.
The example is simplistic but goes to the underlying issue that is not necessarily a clear way shareholders are looking for more value. A theory of a simple method, to take care of the interests of the principals, suddenly became complicated. Sometimes selling a company makes sense. In other cases, the obvious approach is to invest money back into the company to build its strength and capabilities in the long run.
The executives are responsible to the board, which is responsible to the shareholders. However, there is also a legal doctrine known as the business judgment rule. Executives are not responsible for losses if they make reasonable decisions in good faith.
Economists who are shareholder value diehards might argue that any goal other than making more money for investors is a mistake. But is it? If there is an absolute need to consider only shareholder value, then everything must be sacrificed for that purpose. As shown in entry level calculus, you can only maximize one independent value in an equation at any given time. If the added value—and remember, we can’t even make a definition for all investors all the time even in a company—can come from getting value from workers, customers, and business partners. , then that is what should happen.
Any half-competent businessman can tell you what a disaster that is. Most companies and good business strategies need to attract and retain a good workforce. They must develop mutually beneficial partnerships with suppliers, distributors, resellers, and others. A company must satisfy regulatory requirements, ensuring that it brings value to the communities in which it operates, if only to not be cut off at the knees by one interest or another. Businesses must balance multiple interests to survive in the long run; stay ahead of the competition; growth, expansion, and profitability. An overly simplistic formula will never work.
“But that’s not what we mean,” economists, who often simplify the dynamics of systems to find approximate solutions to problems, will say. “In coursethe company has to stay afloat.”
That’s right. That’s where “just considered shareholder value” really breaks down. The company is also an interest and the ship in which the shareholders can see some of that value, whatever it is for them. Corporations often stay in some lines of business, start new ones, drop others, explore different markets, try different forms of operation, attract workers while looking for changing the best ways to keep them, and avoid the risk, to discuss some considerations that face managers.
A pure focus on shareholder value becomes a focus on corporate value and the changing conditions that require changes to what has worked in the past. If managers can’t think about what’s good for the company in the future, they can’t do their jobs. Similarly, if investors cannot consider the factors that may affect their investments in the future, and consider whether a business is paying attention, they cannot ensure their own interests.
This is where the haters of ESG make the biggest mistake, because they think that such considerations are only for some “woke” social recognition, not growing the future customer base, getting the best employees, avoiding environmental risks (good factory you have there, too bad. you didn’t move it from the flood plain to), and ensure the best management.
As Minow writes, “ESG is never about trading financial goals for social goals; it’s about using non-traditional indicators to better assess risk and return.”
Perhaps exalted economists can try to talk to experts in running companies and investing in them and ask why so many pay so much attention to ESG. Is it all wrong? Yes, because everyone is human, mortal, and fallible. But is it automatically wrong because you want it for some reason? Not a scientific or rational approach.
Follow me Twitter or LinkedIn. See my website.