The Millennial Corporation: Strong Stakeholders, Weak Managers

Abstract

Corporations and investors across the economy are embracing the idea that businesses must be sensitive to the environmental and social implications of their actions. This Article offers a novel account for the the rise of Environmental, Social, and Governance “ESG” in corporate law and governance. Analyzing the effects of millennial behaviors – and the way they are perceived – it shows that CEOs’, Index fund managers, and activist hedge funds, face powerful incentives to promote ESG goals. Millennials’ inclination, or their reputation thereof, to take their politics to the workplace, the store, and to their portfolio, and their willingness to boycott, walkout and divest, we argue, have created a multichannel pressure on managers to promote ESG.

Risk averse CEOs may rationally invest corporate money to minimize the personal risks from boycotts, cancels and walkouts. Big three managers, who traditionally faced weak incentives and weak competition, respond strongly to the opportunity (risk) of winning (losing) investors with ESG activism. Activist hedge funds target firms with ESG vulnerabilities as a leverage to win the big three votes for board seats. CEOs may further promote ESG to avoid funds voting against management in annual elections, and activists targeting their ESG weaknesses. Finally, ESG demand could facilitate ESG regulations by pressuring managers to reduce lobbying activities that are not aligned with ESG, and tilting the cost benefit analysis in favor of ESG rules.

Since the current rise of ESG is driven by bottom-up pressure, it provides real results for stakeholders, and potential efficiency gains when firms internalize costs on the environment or their parties. Yet, our account suggests that the current rise of ESG might have some perils as well. The incentives to respond to ESG demands, the Article shows, are not tied to shareholder value, and could also lead to excessive ESG investments. We present a theoretical analysis, discuss evidence, and derive implications for corporate law.

Keywords: ESG, Socially Responsible Investing, Shareholder Activism, Diversity, Millennials, maximizing shareholder value, corporate governance, corporate finance, hedge funds

JEL Classification: G11, G23, K22