This article originally appeared here in 1819 News.
The Business Roundtable is a national association of influential CEOs from numerous fields, industries, and publicly traded companies. It lobbies for policies that allegedly generate jobs and economic growth. In 2019, it issued a controversial statement purporting to redefine the purpose of corporations.
What, historically, was the purpose of corporations? The traditional understanding was that chiefly they maximized profits for shareholders. Profits, of course, are the total revenues of a corporation minus its expenses.
If they don’t earn profits, companies go out of business.
The Business Roundtable suggested that shareholder primacy was no longer optimal for corporations. Instead, stakeholders were at least as important as shareholders to companies’ long-term health.
What’s a stakeholder? It’s difficult to say. Some stakeholders are easy to identify — employees or customers, for instance. Others are vague: communities or society writ large.
The Business Roundtable predicated its announcement on two fallacies: first, that businesses don’t help communities or society when they prioritize profits and, second, that businesses pursuing profits don’t adequately account for the interests of customers, employees, or suppliers.
In fact, businesses that satisfy customers, employees, and suppliers outperform competitors. Moreover, profits enable companies to contribute to communities and society. After all, companies need profits to hire employees, offer benefits packages, provide goods and services, reach new markets, and expand their operations.
Without profits, companies cannot satisfy financial obligations. Simply put, companies that aren’t profitable fail. And what can failed companies do for communities or society — other than provide useful data about their failure?
Consider what profits, directly or indirectly, make possible: cures for disease, ease of communication and transportation, renewable energy, and revolutionary technology. Because individuals and companies sought profits, we live longer and healthier than our ancestors did.
Even successful creatives who chased dreams or ideals rather than solely profits could not realize their ambitions without profits to support them.
Although The Business Roundtable intended its redefinition to make corporations look good, it inadvertently widened the latitude for executives to do harm. Profits are a clear measure of success and usually a straightforward matter of accounting. But how to assess ambiguous standards like “societal impact”?
A company president might explain away declining profits by prevaricating, “The purpose of our corporation isn’t strictly the profit motive. We may have sold fewer units this year, but we met our benchmarks by integrating environmental and diversity quotas in our governance and practices.” This excuse illustrates how executives can characterize losses as wins, or failures as successes.
Moreover, stakeholder capitalism empowers bad actors to conceal mischief and mismanagement by diverting attention from the company’s bottom line and towards popular social trends. For example, corporations have misled consumers and regulators by “greenwashing” or “wokewashing.” (If you don’t know those terms, look them up!)
A perfect example is Silicon Valley Bank (SVB). Its 2022 Environmental, Social, and Governance (ESG) report is full of grand declarations about responsible governance and risk management. A few months after issuing this report, SVB failed, precipitating banking troubles all over the world.
Or consider the failed crypto exchange and hedge fund FTX Trading, which received high ESG ratings despite a governance structure that contributed to financial collapse and bankruptcy.
Businesses that follow the law, differentiate themselves with hospitality and customer service, engage in philanthropy, and operate honestly and ethically already improve the lives of stakeholders, multiply opportunities across society, and add value to communities. They need not reinvent themselves along the modern model propounded by The Business Roundtable.
“If it ain’t broke, don’t fix it.” The Business Roundtable’s definition is unnecessary and damaging. Although outlier businesses have been guilty of scandal or fraud, and not every executive is honest or upright, most businesses most of the time act with decency and integrity when the laws they follow are just and the appropriate incentives are in place.
Just because some famous CEOs claim they’re changing corporations for the better doesn’t make it so. They may have ulterior motives.
This piece originally appeared here in 1819 News.
Recently I spoke to Bryan Dawson of 1819 News about the Environmental, Social, and Justice (ESG) movement that permeates corporate America. You can watch our interview here.
ESG can be understood in two ways: first, as a framework or strategy that individual corporations undertake internally and, second, as the nonfinancial standards, metrics, or factors that asset management firms, financial institutions, and institutional investors, among others, consider when they allocate capital or assess risk.
For convenience, let’s call the first “micro ESG” and the second “macro ESG.” Macro ESG consists of governments, central banks, non-governmental organizations (NGOs), asset management firms, finance ministries, financial institutions, sovereign wealth funds, and a global consortium of institutional investors that collaborate to operationalize ESG among and between businesses in all industries (i.e., at the micro level).
The combined entities comprising macro ESG exert extraordinary power over companies in various fields and countries. Because these entities manage assets and financial instruments from currency and loans to stocks and bonds, they control capital flow throughout the world. After all, every company—to say nothing of the individuals who comprise it—seeks to bank or invest. Therefore, companies of all sizes are subject to the systemic trends that macro ESG creates and sustains.
Those trends are, for the most part, politically leftist.
“Diversity,” however, is one concept characteristic of ESG that could, under certain circumstances, appeal to both the left and the right. Properly practiced, it can be good for organizations, which benefit from the creativity and innovation that result when different ideas and perspectives converge. Unfortunately, too many companies reduce “diversity” to the simplistic rubric of race and gender, neglecting other factors that would enrich the workplace.
The Alliance Defending Freedom (ADF), a faith-based legal organization known for its First Amendment litigation, has produced a Viewpoint Diversity Business Index to track how banks and financial institutions measure on free speech and religious freedom commitments. ADF reached out to 100 major companies to invite them to participate in a survey for the index. One such company, Regions Financial, is headquartered in Alabama and did not participate.
The Viewpoint Diversity Business Index is, according to its website, predicated on the following statement: “We recognize that powerful companies in the tech and financial services industry have emerged as de facto gatekeepers of essential services and become crucial mediums of expression in the digital public square. While many of these companies make important contributions to our economy and society, they undermine trust and the institutions of democratic self-government when they engage in censorship, enable cancel culture insider their organizations, or take divisive stands on controversial political issues.”
Because ESG emanates from financial intermediaries—banks, asset management companies, brokerage firms, trust companies, payment processing servicers, and so forth—The Viewpoint Diversity Business Index targets ESG. It seeks to stop banks from denying financial services to politically disfavored people and industries.
Are banks really doing that?
Yes. The practice is called “debanking.”
The Canadian government, on the alleged grounds of a public emergency, recently froze the private bank accounts of truckers protesting their government’s Covid-19 rules and restrictions. JPMorgan Chase closed the account of the National Committee for Religious Freedom (NCRF). Chase Bank terminated the accounts of performance artist Martina Markota, activist Laura Loomer, and Proud Boys members Joe Biggs and Enrique Tarrio. Bank of America refuses to fund oil and gas projects in the Artic National Wildlife Refuge, portions of which were authorized for drilling until President Biden suspended that practice by executive order in 2021.
Citybank has restricted credit and banking services for certain gun manufacturers. JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo have taken measures to undermine the firearms industry, which, of course, is otherwise fiscally responsible and creditworthy—and which remains one of the most heavily regulated industries in the entire world.
Visa, Mastercard, and American Express have created merchant category codes for gun shop sales, which will no longer be labeled “general merchandise.” PayPal has closed accounts of individuals associated with the January 6 Capitol Riot as well as of groups that the Southern Poverty Law Center deems hateful.
You don’t have to like or agree with the objects of debanking to recognize that it’s a problem with potential far-reaching consequences.
And it’s not just conservatives who should be concerned. One can imagine a future in which banks and payment processers deny services not only to organizations like Oath Keepers, but also to the Southern Poverty Law Center (SPLC) due to allegations that the SPLC spreads hate and misinformation. If banks go political, some will begin servicing only “rightwing” clients, and the the financial services industry could fracture along political lines. Politicians, in turn, might pursue new banking regulations that could be weaponized against political adversaries.
In short, ESG in financial services will sharpen political divides, taking the culture war to board rooms and then to all companies (because all companies depend on financial services). Historically, companies stayed out of politics and served clients with wide-ranging political principles on the understanding that business was about providing needed goods and services to as many people as possible.
The Viewpoint Diversity Index is a useful and creative step toward depoliticizing corporate America and raising awareness about ESG. Everyone should study its findings to determine whether his or her bank is healing or magnifying the political turmoil that is fundamentally changing the character of our country—and at costs that remain incalculable.
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