The Business Roundtable last year made a stir by claiming that business should no longer maximize shareholder value, but instead respond to ESG (environmental, social and governance) concerns. Skeptics, including this column, pointed out that capitalism was not designed to run on that basis, and would fail if it was adopted. However, the coronavirus response has highlighted that government as well as business needs to be run in the interest of its “shareholders” the voting public, and that the fewer ESG policies it adopts, the better.
For corporations, the ESG meme is basically a way for the left to force corporations to work towards their political goals. The “G” for governance is not taken very seriously, although many corporations are still lacking in that area, with no proper control on the Chief Executive Officer and none at all on the CEO’s pay, which is set by consultants motivated to make it as high as possible. The “E” represents the usual environmental goals, not these days in terms of cleaning up industrial activities – most corporations either do that automatically or have subcontracted manufacturing to China – but to further the “green” agenda. The “S” represents social goals; these are somewhat more amorphous depending on what is fashionable in any given year, but certainly include a broad range of affirmative action activities such as ensuring that its top management has adequate representation of women and minorities.
These goals are not automatically antithetical to the shareholders’ interest in the company making a decent profit. Governance, if done right, is positively good for profits, and a certain amount of care about board representation for women and minorities can help the company serve those groups better. Only the environmental goals are explicitly dangerous to the bottom line, which is why most companies pay lip service to them, vow to meet the maximum possible goal by 2050 (safely in the term of the next CEO but three), and otherwise try to evade them.
Proponents of ESG goals naturally favor their pursuit by government. For them, environmental and social policy are the essence of government; the only point of getting companies to adhere to ESG principles is to make their furtherance by government more effective. They would also hold it as a first principle that government should have good governance, although in practice their own adherence to such standards is often lacking.
Opponents of ESG standards claim that they make companies poor practitioners of their primary function: to provide goods and services and thereby make a profit. They have a good point. It is worth extending the principle, to consider whether the well-established ESG principles embedded in government have not compromised its mission also. If you define the mission of government purely as maximizing the income of its voters – who can be taken as the equivalent to the shareholders in a private corporation – do you not in fact get a clearer mission statement and a leaner, more effective body than the vaguely socialist behemoths we see around us today?
“Maximizing the income of its voters” does not imply anything about the distribution of that income. Theoretically, government could fulfil this mission by legislating purely in the interests of billionaires, inflating asset values through monetary and fiscal policy in such a way that the billionaires grow richer and richer, while everyone else languishes. Indeed, there is an argument that the crazed monetary policies of the last two decades have achieved precisely this. But in reality, the drag effect of “funny money” on productivity is so great that now, 25 years after their introduction, those policies can no longer claim to have maximized the income of the U.S. people, even including all the billionaires.
The popular leftist philosopher John Rawls (1921-2002) in his 1971 “Theory of Justice” proposed a thought experiment whereby if you were designing a society’s rules you would do so under a “veil of ignorance” under which you would not know which position in that society you were to hold. In Rawls’ view, your natural risk-aversion would then make you design the society to load welfare benefits on the least fortunate, the utterly impoverished and those with incurable diseases. The state would be vastly powerful, its sole goal being to minimize inequality or even eliminate it altogether.
In my view, however, the bottom 2-3% of people have such miserable lives, with illnesses, addictions and impoverishment, that no amount of welfare payments can make them happy. Hence a truly rational Rawlsian, veil of ignorance and all, will optimize the incomes, not of the impoverished, but of the great mass of the working-class and middle-class, recognizing that there will always be a small percentage of people whose lives are destined to be utterly miserable. When you enter such a society, you take a 97-98% chance of having your welfare maximized and accept that, when
God (no, not God, Rawls does not accept the existence of such a being) the Supreme Bureaucrat inserts you into the society, you will be rolling the dice and might get unlucky. In this sense, therefore, a state without ESG goals will attempt to maximize the welfare of its citizens.
It must surely be clear to readers of this column that a state without ESG goals, maximizing the welfare of its inhabitants, will be a minimalist state run on the principles outlined by Adam Smith and others in the British 18th Century. Asset bubbles will be prevented by running a sound banking system and a Gold Standard, so that there is no inflation and interest rates remain securely positive, preventing the asset inflation and private equity games of the last two decades that have enriched billionaires and impoverished everyone else.
The rights of ordinary workers to the fruits of their labor will be ensured by running a system of rock-solid property rights, with savings encouraged and government as small as possible. Since every percentage of GDP diverted into government is a percentage of GDP subjected to massive inefficiency and political decision-making, the objective will be to maintain Federal government spending at 3% of GDP, as it was in President Calvin Coolidge’s day. Federal regulation also, will be devolved to the state level, as it was before the New Deal.
All other functions will then be devolved to the states, which through the Tenth Amendment will be allowed almost complete freedom to follow whatever policy they wish. Theoretically, this might not maximize the welfare of those poor souls compelled to live in California or New York and subjected to the Marxist or simply corrupt fantasies of those places’ less than ideal governments. But one must recognize that there is a percentage of people that actually like Marxist squalor; their welfare in Rawlsian terms will be maximized by allowing them to live in their own private pig-pens.
For the rest of us, there will be other states, managed on more explicitly free-market lines without additional regulations. (In such a society, I would make a plea for some decently free-market state outside the South — Oregon for example; my welfare is not maximized by subjecting my overweight corpus to summer temperatures of 110 degrees Fahrenheit.) By their lack of regulation, sound economic policies and small government, those free-market states will both satisfy the capitalist requirement of maximizing the income of their citizens (who can be assumed to lack irrational desires for socialism) and the Rawlsian requirement of maximizing their citizens’ welfare.
For those not ideologically committed to the “ESG” agenda, their welfare is maximized by not only preventing private enterprise from following ESG goals at the expense of profits, but also by preventing government from doing the same thing. As Rawlsians, we recognize the right of committed socialists to live in squalor of their own choosing, but demand a similar right for ourselves, to have a government that ignores the ESG agenda and by doing so, maximizes our welfare.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)