It seems the modern corporate mission statement could use an update: Do well by doing good—or else.
Earning the perception of good corporate citizenship, in the form of environmental, social and governance bona fides, is no longer optional for the modern executive. That point was driven home last month as Exxon Mobil shareholders elected two directors nominated by an upstart activist hedge fund unhappy with the oil giant’s climate policies. A third director is likely to win election, the company said Wednesday. The activist’s victory was especially jarring because it owns a tiny fraction of Exxon stock and Chief Executive Officer Darren Woods had campaigned personally against the movement.
The vote marks a high point of sorts for the multiyear ESG movement, a framework that calls for investors to consider a company’s overall impact on the world beyond its financial returns. The trend shows no signs of slowing down. There have been 610 news releases mentioning environmental, social and governance principles from current S&P 500 members so far this year through May, according to data from financial research firm Sentieo. That is more than double the rate of the same period last year.
Investors care a great deal about ESG harmony when stock prices are high and times for big business are good, and boy are they good. Interest rates have hardly ever been lower and corporate tax rates are still favorable. Government policies on key issues such as antitrust have been permissive. A Wall Street Journal analysis found that median pay for the chief executives of more than 300 of the biggest U.S. public companies reached $13.7 million last year, up from $12.8 million for the same companies a year earlier. The onset of a global pandemic and subsequent recession left many of the largest companies and their bosses in an even stronger position. But a turn in the stock market’s fortunes could slow the ESG craze on Wall Street.
As for consumers, they are bound to focus less on issues such as clean energy if, say, traditional fuel sources become more scarce. Don’t expect motorists to appreciate a feel-good origin story for gasoline that costs eight bucks a gallon.
The socially-minded aspirations of big corporations and their executives seem performative to their critics and, to a not-insignificant share of the public, veer into partisan politics. But in this environment, such behavior in the C Suite is entirely rational. There is real demand for good feelings among consumers and investors.
“We’re not hungry for a cause. We’re starved for a cause,” entrepreneur and former hedge-fund manager Vivek Ramaswamy told me. Mr. Ramaswamy, the chairman of Roivant Sciences and the author of “Woke, Inc.: Inside Corporate America’s Social Justice Scam,” argues that declining membership in organized religion and waning faith in public institutions create a void that businesses can help fill. “The value of a product used to be based on how well it functions—now it includes its origin story,” he says. Tesla CEO Elon Musk’s popularity in some circles, for instance, is tied to his persona as a maverick executive fighting climate change.
The structure of modern Wall Street feeds demand as well. The rise of strategies such as indexing mean that large asset managers are more powerful than ever. They also have to worry about their image, because funds with an ESG mandate are attracting money from investors and often command higher fees than other offerings. What is more, large fund managers often follow the recommendations of shareholder advisory services when voting in a proxy contest. As a practical matter, winning the vote of millions of shares can require convincing just a few key individuals of a proposal’s merit.
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This leads to a simple question for executives. “Do you want your company’s stock to have inflows?” Nick Mazing, director of research at Sentieo, asks rhetorically. Not being in the club can be costly: Even before the Exxon campaign, so-called vice stocks such as tobacco companies and fossil fuel producers have been relative laggards compared with those of businesses perceived to be environmentally friendly.
Don’t expect this state of affairs to change soon. Large pension funds and other Wall Street kingmakers have signed the United Nations-backed Principles for Responsible Investment, a document from 2006 that calls for investors to weigh ESG principles in making investment decisions. Those who sign on may well have an easier time accessing capital than those who don’t. Companies have begun issuing debt with special rules that tie interest rates to whether the issuers meet self-made targets for goals such as cutting carbon emissions or for naming more women to corporate boards.
The shocking turnabout at Exxon offers other companies a warning about what the future holds. About a decade ago, oil executives would publicly play down the environmental impact of an oil spill. Now, a descendant of Standard Oil itself must give climate activists a say in its corporate strategy.
“You might not be interested in ESG, but ESG is interested in you,” says Mr. Mazing.
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Appeared in the June 5, 2021, print edition as ‘It’s a Tricky Time to Be A CEO Without a Cause.’