Some data show that the recent significant increase in board diversity is less well explained by NASDAQ and CA regulations than by the Black Lives Matter Movement. How did the BLM Movement against police behavior become a call for racial justice that reverberated in corporate boardrooms? More generally why do CEOs, boards, and managers (members of what C. Wright Mills would call the “power elite”) pursue (or want to appear to be pursuing) ESG policies? This article answers such questions by identifying the increasing power of some of the millennial generation — those born between 1981-1996 — as consumers, employees, and investors.
As the authors show “Social issues can become financial problem in short order.” (P. 304.) Their examples are Black Lives Matter, Me-Too and Climate Change. If this article were written today, they might discuss the Governors of Florida or Texas and index funds value-diversifying their funds ( e. g. Catholic faith-based investors), with the consequent loss in the index fund’s concentrated voting power. As the authors admit, “current views on ESG are polarized.” There is conflict within the power elite. The Millennial Corporation: Strong Stakeholders, Weak Managers reveals strategies for getting ESG into corporate action.
That corporations respond when they are targeted specifically — by politicians or boycotts of their products, walkouts by their employees, or shareholder proposals — is not difficult to explain, especially today when social media can multiply such attacks. Sometimes fighting back means to compromise. The power of general social movements — ones not targeted at one’s corporation — to influence corporate decision-making is more difficult to understand. This article examines channels through which a general social movement for better ESG can get into corporations.
When the article was written, even firms “indifferent to the social demands of ESG understand that being labeled a bad corporate citizen when it comes to climate or diversity can have effect on firm value.” (P. 297.) The authors provide multiple examples where being objectified as anti-ESG was costly for companies and the individual careers of their managers: “Considering the risks that managers face from ESG failures, the inability to diversify this risk, and their option to mitigate with firm resources, it is simply incorrect to assert that managers have no incentive to promote ESG.” (P. 299.) Even more, their incentives support “what sometimes seem to be excessive responses” (P. 262) to external pressures for ESG. When the article was written, the ESG movement was on the move.
The authors portray the millennial generation as the carrier of the ESG movement. They generalize that millennials are committed to living their values and that they value what might be called “woke:” Millennials “generally care about the environment, diversity, and economic inequality.” They are “seeking to live their lives consistent with a set of social values.” (P. 306.) They are willing to pay more and earn less from corporations that have ESG credibility. “Poor ESG performers would have difficulty in employing, selling to, and attracting investor” millennials.1 (P. 281.)
The authors demonstrate five channels through which the rising economic significance of the millennial generation influences CEO incentives regarding ESG performance. First there are direct actions targeting corporations, such as product boycotts. Second, millennial decisions about where to work, what to buy, and how to invest can increase the market value of companies with ESG credibility. Because millennial values are not uniform, there are multiple contenders for a piece of millennial power. At the time of the article, ESG was winning among the millennials to whom many corporations are responsive.
The final three channels depend not on the effects of action by millennials but by those of investment intermediaries and operating corporations who reify millennials in the ways that the authors depict. The third channel derives from index funds recognizing a generational shift in wealth to millennials. Index funds ascribed to millennials the values that the authors assert and so marketed ESG products and voted their shares for ESG to attract millennials. The fourth channel depends on hedge funds that cater to the index funds’ preferences for ESG. Hedge funds can weaponize ESG to attract votes, making ESG a stalking horse for their control challenges. Both of these channels depend on the consolidated shareholder power of the largest index funds, power that is being reduced as they multiply funds for the anti-woke. The last channel concerns how corporations use their political power. Historically, corporations have invested corporate resources to fight regulation. Exposure of corporate anti-ESG actions has generated poor publicity. In response, there can be a decrease in such lobbying. This lets regulators increasingly pursue the policy preferences of the reified millennials.
The authors surely simplify in asserting values shared by a generation. Yet, they demonstrate that some corporations act as if all millennials who matter to them are pro-ESG. As the authors insightfully note, “Investors, consumers, and employees are not distinct groups of individuals. They are the same individuals interacting with companies in various ways.” (P. 304.) These individuals are different from other millennials, at least because they have resources that corporations value. The authors claim they are describing “bottom-up social pressure.” But their point is that some millennials are entering the power elite and those who do so bring with them a distinct set of interests.2
The ESG coin has an opposite side. Many corporations resist ESG and it is increasingly clear that there can be costs incurred by companies identified with ESG. This article does not explore this resistance and its economic/political/social supports. But some inferences can be drawn. This article might be read as arguing that, in response to this growing bottom-up anti- “woke” demand, managers will overinvest corporate resources in not being “woke.” But this article’s analysis is richer than that. It does not simply show that corporations are open to social/political demands in their environment (about which there is a vast literature). It also reveals how generational power can be deployed. The success of the anti-woke movement, the article would predict, depends on whether and how corporations value the movement’s supporters as consumers, employees, and investors.
There is a vast literature about class conflict between capital and labor. Erik Olin Wright and his collaborators and students are particularly worth noting for their description of intra-class conflict within the working class. After all, many wonder why there is so little international, let alone national, working-class power. This article is a welcome addition to a smaller literature on conflicts within elites (a better term than “ruling classes”). It always is important to understand the powerful. This article enhances this understanding by focusing on intra-class conflict within a polarized power elite and describing the use of generational power by the current boomers.
The article usefully points out that “Lawyers, accountants, consultants, rating agencies, data providers like Standard and Poors, ISS, and MSCI” and “third-party standard-setters like the Sustainability Accounting Standards Board and GRI” create an “ESG ecosystem.” (P. 267.) For example, “law firm memos now advise managers to search within for ESG weaknesses and fix them to avoid being targeted by activists.” (P. 261.) There is even a marketing industry that constructs who are the “millennials” (and what are their interests and values). Corporations (and law professors) reasonably accept the constructs. In sum, there are now sectors of the corporate power elite who advance ESG. In so doing, all act on the incentives facing them in their place in the market but in addition some respond to values (including professional ethics). The approach taken in this article by Michal Barzuza, Quinn Curtis and David H. Webber can usefully be employed in looking at this niche or eco-system of elites.
- The authors maintain this position despite knowing that “despite their ethical intentions, ethically minded consumers rarely purchase ethical products” and many investors are “not willing to sacrifice more than 1% of their returns for any social cause.” Values and behavior are not always aligned.
- The youngest millennials will retire at age 70 in 2051 and the oldest in 2066. Most millennials do not invest for their retirement, but those who do may look for target date 2060 retirement funds. These funds may take climate change into account not because of millennial values but because their investors want a future for themselves and their grandchildren. I hypothesize that retirement funds pursuing millennials would rationally take ESG into account.
