Corporate Technocracy ESG Governance Beyond Shareholder Democracy or Managerialism

Aisha Saad is an Associate Professor of Law at the Georgetown University Law Center. This post is based on her article forthcoming in the Columbia Business Law Review. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita and Does Enlightened Shareholder Value Add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

ESG (Environmental Social Governance) is in the crosshairs of a conservative campaign against “woke capitalism”. This is evidenced by an aggressive legislative agenda featuring 181 anti-ESG bills proposed or enacted between 2018 and 2023. Attacks on the legitimacy and practical possibility of ESG are starting to bear fruit. For example, the SEC’s new climate-related disclosure rule has been substantially watered down from its initial draft two years ago. Shortly before that, a number of major financial institutions departed the world’s biggest investor coalition on climate change. In recent months ExxonMobil initiated a high-profile legal battle against two of its investors alleging that their climate-focused shareholder proposal is a bad-faith effort to undermine the company’s business. While some anti-ESG advocacy is motivated by political opportunism, more substantive concern with the problems that riddle ESG governance remains unaddressed.

In a new article in the Columbia Business Law Review, I advance a novel paradigm for governing corporate ESG that accounts for the principal-agent challenges undermining prevailing proposals. I argue that a “corporate technocracy” provides a solution for redeeming the possibilities of ESG by addressing and overcoming key governance critiques.

ESG advocates typically embrace one of two corporate governance paradigms to implement their goals—shareholder democracy or managerialism. Shareholder democracy allows shareholders a greater role in defining corporate ESG agendas and in overseeing ESG performance. It mainly focuses on expanding the shareholder proposal process pursuant to SEC Rule 14-8 and relies on the tools of “shareholder democracy”. From an agency perspective, this model introduces principal-agent challenges between stakeholders, the putative principals in a stakeholder governance model, and shareholders as their agents or the sponsors of their interests. It also introduces coordination costs among different groups of shareholders who advance various, perhaps even conflicting, nonpecuniary objectives and agendas. The shareholder democracy camp proposes no direct mechanisms for stakeholders to oversee their shareholder agents. Their proposal also suffers from an ambiguous account of principals and from a nested agency problem.

The second leading ESG governance paradigm, managerialist stakeholderism, relies on granting managers a widened scope of discretion to govern in the interest of a corporation’s stakeholders. Extending managerial accountability to stakeholders presents several problems. First is the problem of defining stakeholders with adequate precision to make their interests administrable. Second is a problem of reconciling conflicting agendas advanced by different groups of stakeholders. Third is the problem of reconciling between shareholder interests and stakeholder welfare when these come into conflict. While fiduciary duties under controlling Delaware law grant shareholder principals legal standing to seek remedies when managerial agents do not account for their interests, an expanded class of stakeholder principals does not come with corresponding duties. This creates an opportunity for rent-seeking. For even the well-meaning manager, managerial stakeholderism fails to provide guidance for negotiating tradeoffs between stakeholders when choosing among different operational strategies, selecting performance metrics, or prioritizing nonpecuniary benefits.

Both the shareholder-driven and management-driven ESG models fail to address the structural agency implications they engender. In my article, I argue that resolving the challenge of ESG governance is not as simple as assigning control rights to shareholders or to managers. Rather, it requires identifying the nature of an ESG objective, new governance dynamics it engenders, agency costs it creates and exacerbates, and devising mechanisms to account for them. I propose that “corporate technocracy” can account for the novel agency challenges generated by the two dominant ESG governance models, while addressing the structural and legal shortcomings of both shareholder democracy and managerialism.

Technocracy refers to rule by technical experts. It emphasizes institutional accountability, promotes legibility and measurability of corporate purpose, and characterizes shareholders and stakeholders as an information source for defining ESG materiality, particularly for emerging or controversial issues. I identify three main features of a corporate technocracy intended to promote efficient and accountable ESG governance: 1) encouraging ESG specific skills and experiences among managers and board members, 2) adopting materiality as a limit to managerial discretion, and 3) creating channels for stakeholders and shareholders to inform ESG materiality. Technocracy depoliticizes both managers’ and shareholders’ roles in defining ESG, relegating managers to the role of administrators rather than statesmen, and shareholders to the role of informational satellites rather than political subjects. Such a model accommodates the liminal and controversial nature of ESG’s “materiality” and provides a normatively and practically defensible solution to the complexities of ESG governance.

For those who seek to redeem the moderate, incremental possibilities of an ESG agenda while avoiding the pitfalls of both shareholder democracy and managerialism, a corporate technocracy that emphasizes institutional capacity, materiality, procedural accountability, and shareholder protections offers a way through the political quagmire.

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