Unsurprisingly, the Biden administration is pushing pro-ESG (environment, social, governance) policies. I have argued against “woke” investing before, here and here, noting that ESG funds are mostly branding efforts designed to bilk investors with relatively high fees. But the problem with ESG funds and the “corporate social responsibility movement” more generally is much more fundamental.
I was immediately critical of the U.S. Supreme Court’s 2010 decision in Citizens United v. Federal Election Commission and remain so to this day. In that landmark decision, SCOTUS determined that “political spending is a form of protected speech under the First Amendment, and the government may not keep corporations or unions from spending money to support or denounce individual candidates in elections.” Even the dissents showed a profound lack of understanding of U.S. corporate history as explained here, and especially here.
Of course I don’t dispute Americans’ right to voluntarily pool money together to support a political candidate, party, or public policy and indeed find it odd that right should ever have been questioned to the point of litigation. Super PACs, in other words, are as super as the Super Bowl.
What really grinds my gears is the implication that non-political corporations may donate funds to just about anything. As Milton Friedman argued, their sole goal should be the lawful maximization of their respective owners’ profits. ← period! Partners and shareholders may donate to whichever causes they choose, of course, but corporate executives should not be allowed to make that decision for them.
Similarly, nonprofits should donate resources only to the extent that such donations further their respective missions. Nonprofits like the United Way and grant-making philanthropies are fine, of course, but individuals who donate to operational nonprofit X (say, an orphanage) should not have their money redirected to some tangentially related cause Y (like gender reassignment surgery for orphaned tweens).
As recently as twenty-five years ago, few for-profit corporations donated more than 1.5 percent of their pre-tax incomes “and only a very small proportion of corporations g[a]ve anything at all” [Ulf Zimmermann, “Exploring the Nonprofit Motive (Or: What’s In It for You?),” Public Administration Review, 54, 4 (July-Aug. 1994): 401]. While that sounded like paltry pablum to advocates of “corporate social responsibility,” whatever that is, it sounded unfair to millions of stockholders who wondered why corporate executives were being so generous with investors’ money.
Before the 1975 publication of the report of the Filer Commission on Private Philanthropy and Public Needs, which argued that corporations should donate at least 2 percent of their pre-tax incomes, corporations rarely made direct donations to charities or to political causes. Indeed, one of the justifications for the relatively rapid rise of executive salaries after World War II was to allow executives to donate to worthy or political causes as individuals, but on behalf of their corporate employers.
The stigma against corporate giving held so strongly for so long because corporate donations make little sense economically. If they are part of a quid pro quo they reek of corruption and potential tax fraud. If not part of an exchange, they can be used to surreptitiously siphon funds from owners. Even if given with the purest of intentions, corporate donations aggrandize executive decision-makers at the expense of the investors whose interests they are supposed to be serving.
Corporate governance today, after all, is not democratic, even in the vague sense of representative. Generally speaking, corporate elections are not secret and hence voters, especially employee shareholders, are subject to coercion. Moreover, voting power is a function of the number and type of shares owned, and executives control the proxies of many shareholders by default.
In essence, executives have learned how to entrench themselves in power with sham elections much like those held by petty dictators. Were it not for market forces, like declining share prices, nothing could discipline their spending, be it on their own salaries and perks or their charitable or political pursuits.
Named for its chairman, Aetna executive John H. Filer, the Filer Commission called for increased corporate philanthropy because it wanted to bolster donations to the nonprofit or Third Sector, long an important, independent force in American society that had been lagging and sagging for some time. It blamed individual donors for not giving as generously as they had in the past, seemingly oblivious to the financial stresses many Americans felt in the late 1960s and 1970s due to inflationary pressures brought on by sizable federal budget deficits, oil shocks, the end of the Bretton Woods gold exchange regime, and the general suckiness of the Federal Reserve.
Instead of trying to involuntarily tax financially strapped individual investors via corporate donations, the Filer Commission should have called for reductions in government spending and taxes. That would have restored the ability of individual Americans to voluntarily contribute generously to charity and philanthropy as they had for the first century and a half of the nation’s existence. More importantly, it would have prevented corporations from having an oversized influence on politics and policies, including elections and controversial social movements.
It is one thing if 100 million Americans decide to donate $1 to some organization and quite another when a corporation decides, without effective shareholder input, to donate $100 million to that same entity. The former is a form of liberty and the latter a way of taking advantage of investors who may well have preferred to send that dollar to a different organization or to spend it on a different cause, like a can of tuna for their own consumption.
In addition to enticing the investments of Social Justice Warriors with ESG funds, fund managers should consider catering to rational investors by creating funds that invest only in corporations that promise to allow shareholders to make their own political and charitable donations by concentrating on their core businesses and not seasonal social fads. Maybe call them Friedman Funds, after Milton, but also as a homophone for “freed man.”
Until Friedman Funds are available, many Americans will prefer investing in assets that allow them to dispose of any profits the way they want to, not the way some powerful rich guy wants to on their behalf.