Long ago, the economist Milton Friedman wrote that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”^[1] This maxim largely drove corporate behavior for decades,[2] until the “Who Cares Wins” initiative, secular trends and the undeniable effects of climate change, among other factors, started to drive the environmental, social, and governance (ESG) movement,[3] culminating in the rise of ESG funds and the pro-business Business Roundtable releasing a new statement on the purpose of a corporation.^[4] And while Friedman would almost certainly be appalled by the ESG movement, he’d likely be equally appalled by the reactionary anti-ESG movement,[5] which is antithetical to free-market principles, in conflict with the business judgment rule, and bad for business.[6]

Conflict with Free-Market Principles

In his seminal 1970 The New York Times Magazine essay, Friedman wrote, “In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate.”^[7] Obviously America has never fully operated like this^[8] (and as far as I know, neither has any other country), and there is no such thing as a truly free market. Yet for a long time, Republicans embraced this as a utopian ideal, particularly regarding the regulation of commerce.^[9] But as of September 2023, 20 states have enacted anti-ESG laws^[10] and congressional Republicans have questioned financial services and proxy firms regarding “possible violations of antitrust laws based on alleged coordination on ESG issues.”^[11] Texas, for example, has a law that prohibits government entities from contracting with ‘businesses that boycott energy companies.’”^[12] What if it is in the best interests of a municipality to have a financial services firm that happens to boycott energy companies underwrite its bond offering? In an ideal free market, it would be able to do so. And if it’s in the best interests of the financial services firm and its stockholders to cease lending to an energy company, in an ideal free market, it should be able to do so.

North Dakota “prohibits insurers from refusing to insure or charging a different rate based on ESG criteria, DEI policies, or political and ideological factors.”^[13] In an ideal free market, an insurer would be able to refuse insurance or charge different rates based on what is best for its insurance business. Thankfully, the North Dakota law “does not apply in cases where the refusal or different rate is the result of the application of sound underwriting and actuarial principles.”^[14] This implies that if an insurance company conducts sound underwriting and determines that an environmental issue, for example, poses an insurance risk that the insurer is uncomfortable with, it can refuse insurance, which suggests that the law is merely political posturing. But the fact that it exists at all conflicts with free market principles.

Leo E. Strine, Jr. argues that the anti-ESG movement echoes Friedman’s stockholder primacy position that “business leaders had no legitimacy to use their fiduciary power over corporate funds to advance social or political ends.”^[15] However, he concedes that the movement goes beyond the Friedman stance in its argument that corporations should only focus on profit, even though managing climate change risks impacts potential profits.^[16] Friedman even argued in his infamous essay that “it may well be in the long‐run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government” and “this is one way for a corporation to generate goodwill as a by‐product of expenditures that are entirely justified in its own self‐interest.”[17] In other words, corporations can and should take actions, even “woke” ones, that are in their best interests, and Friedman “cannot summon much indignation to denounce” these cloaked actions.[18] For example, companies like Google, Meta, and Disney are building housing near their headquarters, where rents and home prices have increased dramatically in recent years, in part because of the growth of these firms.[19] Some might argue that this is an ESG initiative designed to consider the companies’ broader stakeholder groups; others might argue that it is a self-interested expenditure cloaked in ESG. Either way, if these firms want talented employees to build profitable products, the employees need somewhere affordable to live.

In an opinion piece, Senator Marco Rubio cites “when Coca-Cola threw a tantrum over Georgia’s voting integrity law” and Gillette losing “billions of dollars in revenue” because of backlash from its “toxic masculinity” advertising campaign as examples of corporate actions that would be ripe for lawsuits under his proposed Mind Your Own Business Act.^[20] But if shareholders didn’t like Coca-Cola’s “tantrum,” they could have simply sold the stock and consumers could have instead bought Pepsi—that’s how a free market works. And while there were likely other factors that contributed to Gillette losing money in the wake of the ad campaign,[21] even if the lost revenue could be solely attributed to backlash from the ad, consumers voted with their feet—the free market worked!

Finally, should purveyors of environmental sustainability consulting services or renewable energy not be able to make a living doing so? Republicans might say “no,” but a free market would say yes.

Conflict with the Business Judgement Rule

Not only do anti-ESG laws fly in the face of free-market principles, but they conflict with the business judgment rule, a legal doctrine that presumes that a corporation’s directors make rational business decisions on an informed basis, in good faith, and with the belief that the decisions are in the corporation’s best interests, and thus protects them from liability for their decisions absent fraud, conflicts of interest, or gross negligence.[22] “Even scholars who advance a shareholder primacy view have agreed that boards of directors have significant discretion in nearly all circumstances to exercise their business judgment and that pursuing stakeholder interests can create value.”[23]

Rubio’s 2021 Mind Your Own Business Act would create a cause of action for shareholders holding specified volumes of shares if a company they have invested in boycotts a state because of the state’s social policies, denies goods or services to specific industries, implements DEI policies, or promotes “a covered divisive concept,”^[24] among other actions. The bill “would put the burden of proof on the company to show that these actions were in shareholders’ best interests, and make corporate officers personally liable if they can’t prove it.”^[25] The bill explicitly states that a company’s actions that are intended to improve employee morale or hiring, reputation, or cost of capital, are not pecuniary interests.^[26] But an argument can be made that these actions are pecuniary interests. “These are pecuniary issues if you broaden what is a reasonable investment timeline. If they hold an asset for 10, 20, 30 years it is in my pecuniary interest to make sure that climate change, DEI are considered,” said Jon Solorzano, an attorney specializing in ESG matters at Vinson & Elkins.[27] Even in the near term, an argument could be made that DEI, to the extent that it leads to a more engaged and productive workforce or makes the company more attractive to talented potential employees, has a positive economic impact. On the other hand, if prospective employees or customers are turned off by a company’s DEI or other ESG efforts, there could be a negative economic impact (see, e.g., Bud Light). And ESG programs intended to lower the cost of capital clearly have immediate economic effects.

The anti-ESG movement is not just in conflict with existing bodies of law—it is bad for business. Investors and directors have an obligation to consider how climate change and other factors will impact their investments or businesses and anti-ESG laws and congressional subpoenas are a distraction from using their judgment—in which shareholders have given their trust through board elections and investment due diligence—to manage the business or direct investments in ways that will maximize shareholder returns. Ultimately, as Larry Fink has noted, “There are many people with opinions about how we should manage our clients’ money. But the money doesn’t belong to these people. It’s not ours either. It belongs to our clients, and our responsibility and our duty is to them.”[28]

Finally, it is worth noting that Rubio’s proposal is a federal bill, and “[t]he corporation is a creature of the state ‘whose very existence and attributes are a product of state law.’”[29] Remember when in addition to preaching free-market principles, Republicans also preached “states’ rights”? One could also argue that anti-ESG laws, as they pertain to corporate statements or initiatives like Disney’s reaction to Florida’s “Don’t Say Gay” law, violate a corporation’s free-speech rights. If a corporation is a “person” for the purposes of campaign donations a la Citizens United,[30] how come it is not for the purposes of social activism related to the company’s interests?  

Conclusion

In his opinion piece, Rubio wrote, “The question is how do we, patriotic Americans who love capitalism and freedom, fight back against the growing tyranny of the woke elites running corporate America?” And yet, by pushing anti-free-market policies, Rubio and his brethren prove that they love neither capitalism nor freedom. The real question should be, “how do we, patriotic Americans who love capitalism and freedom, fight back against the growing tyranny of the hypocritical, power-hungry politicians desperate to retain an outdated and never-realized version of America before it’s too late?” Rubio and his brethren should mind their own business and let corporations do what is best for their business and stockholders (and society at large, if doing so is in the company’s interests over the long term). That is how a free market works.

 

 

 

[1] A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times (nytimes.com).

[2] Some have argued that Friedman’s doctrine and 1970 essay had less influence on management practices than he has been given credit for. See, e.g., Stop Blaming Milton Friedman! by Brian R. Cheffins :: SSRN.

[3] “ESG, at its core, is a means by which companies can be evaluated with respect to a broad range of socially desirable ends.” It means different things to different people, but could include energy efficiency, carbon emissions, workplace policies, labor standards, board composition, executive compensation, and lobbying, among many more factors. Introduction to ESG (harvard.edu).

[4] See The Making and Meaning of ESG by Elizabeth Pollman :: SSRN, p. 6-19; see also BRT-StatementonthePurposeofaCorporationwithSignaturesOctober2022.pdf.

[5] The anti-ESG movement largely stems from perceived bias against fossil fuel and firearms companies, and as a reaction to the DEI movement; see POLITICO Pro | Article | Both sides are bracing for escalation in the war over ESG (wrlc.org); see also Corporate Counsel Navigate ESG Red State, Blue State Minefield (bloomberglaw.com).

[6] To be clear, I am not advocating against regulations, merely that the anti-ESG movement is bad for corporations, investors, and society, and hypocritical. This is consistent with Friedman’s “rules of the game” statement and the sentiment expressed in the latter half of note 7. A proposal for how to properly mitigate the effects of climate change is beyond the scope of this paper.

[7] A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times (nytimes.com).

[8] Liberal and conservative academics have both argued that America was not founded on free-market principles. See, e.g., Exposing the Big “Free Market” Myth with Author Naomi Oreskes | Stanford GSB Corporations and Society Initiative (“If you know anything about Alexander Hamilton … you know that many of the founding fathers were big advocates of government engagement…”); see also The Capitalist Foundations of America | American Enterprise Institute – AEI (“I am also not claiming that America at any point has been committed to a policy of free markets. There are no free markets. Markets must be defined by law and the rules of the market enforced.”).

[9] For example, “President George W. Bush obfuscated the reality of human-caused climate change, pursued deregulation that was inconsistent with addressing it, only to become somewhat more acknowledging of its reality after securing a second term.” Ignorance is Strength: Climate Change, Corporate Governance, Politics, and the English Language by Leo E. Strine, Jr. :: SSRN, p. 19 (internal citation omitted). President Ronald Reagan advanced policies that curbed the FTC, EPA, EEOC, and OSHA, reined in the DOJ’s antitrust division, removed thousands of acres of public lands from the protected category, pushed for free trade, and pushed to shift government activities to the private sector, all in an attempt to end “what he called the ‘adversary relationship’ between government and business.” RONALD REAGAN DIES AT 93; FOSTERED COLD-WAR MIGHT AND CURBS ON GOVERNMENT – The New York Times (nytimes.com).

[10] ESG Investing Regulations Across the 50 States – Publications (morganlewis.com)

[11] The ESG Investing Debate: 2023 Year-End Updates – Publications (morganlewis.com).

[12] Corporate Counsel Navigate ESG Red State, Blue State Minefield (bloomberglaw.com).

[13] ESG Battlegrounds: How the States Are Shaping the Regulatory Landscape in the U.S. (stblaw.com).

[14] Id.

[15] Ignorance is Strength: Climate Change, Corporate Governance, Politics, and the English Language by Leo E. Strine, Jr. :: SSRN, p. 8.

[16] Id. at 9.

[17] A Friedman doctrine‐- The Social Responsibility of Business Is to Increase Its Profits – The New York Times (nytimes.com).

[18] Id.

[19] America’s New Company Towns: Google, Tesla, Meta Are Becoming Landlords (businessinsider.com).

[20] Sen. Marco Rubio: Here’s how we fight the woke elites running corporate America | Fox Business.

[21] Gillette’s parent company, Proctor & Gamble, and pundits have cited men shaving less, currency fluctuations, and increased competition as other reasons for Gillette’s revenue sliding in the wake of the ad. Procter & Gamble: Three Years After Gillette’s “We Believe” | by Pranav Guru | Medium.

[22] Ask a MoFo: What Fiduciary Duties Do I Have as a Director of a Delaware Corporation? | Morrison Foerster.

[23] The Corporate Governance Machine by Dorothy S. Lund, Elizabeth Pollman :: SSRN, p. 2614.

[24] Text – S.2829 – 117th Congress (2021-2022): Mind Your Own Business Act of 2021 | Congress.gov | Library of Congress.

[25] Sen. Marco Rubio: Here’s how we fight the woke elites running corporate America | Fox Business.

[26] Text – S.2829 – 117th Congress (2021-2022): Mind Your Own Business Act of 2021 | Congress.gov | Library of Congress.

[27] Corporate Counsel Navigate ESG Red State, Blue State Minefield (bloomberglaw.com).

[28] Larry Fink’s Annual Chairman’s Letter to Investors | BlackRock.

[29] Senator Marco Rubio’s “Mind Your Own Business Act” would make bad law and is premised on dumb policy grounds – ProfessorBainbridge.com.

[30] Supreme Court Blocks Ban on Corporate Political Spending – The New York Times (nytimes.com) (the Supreme Court ruling confirmed that corporations are covered by the First Amendment).