Politics of ESG Data: Corporate Governance Challenged
By Arthur Kohn, Contributing Author /September 26, 2023
Arthur Kohn has practiced law since 1986, focusing on compensation and benefits matters, including executive compensation, pension compliance and investment, employment law, corporate governance and related matters. In 2021, he was appointed as a fellow to the American College of Governance Counselors.
Arthur is an adjunct professor at New York University School of Law and a regular guest lecturer at Columbia Law School. He frequently speaks and writes about executive compensation, taxation and corporate governance matters. He repeatedly has been recognized for his work by the business and legal press, including Best Lawyers, Chambers USA, The Legal 500, Super Lawyers of New York and others.
Arthur received a B.A. from Columbia University and a J.D. from Columbia Law School, where he was admitted into the Accelerated Interdisciplinary Legal Education program, was appointed a Harlan Fiske Stone Scholar and received Phi Beta Kappa honors.
ESG Data, Politicians and Corporate Governance
This note is about current ESG data and corporate governance topics, and how political partisanship connects the two. It lays out an argument that issues around ESG data are going to be used by politicians in a way that will impact corporate governance, and that directionally that impact is hard to predict and creates some interesting uncertainties.
Not an Academic Issue
Before I get into that argument, I want to note a few basic data points suggesting that this topic is important. I don’t think these should be surprising, but I want to make the point at the outset that this note is not about some wonky academic issue.
A 2021 Bloomberg analysis says that:
Assuming 15% growth, half the pace of the past five years, ESG assets under management could climb to more than a third of the projected $140.5 trillion global total by 2025. ESG assets are on track to reach $53 trillion, based on our analysis, up from $37.8 trillion by year-end. They jumped to $30.6 trillion in 2018 from $22.8 trillion in 2016.
It is fair to be skeptical about arguments that start by referring to trillions of dollars. It may very well be these days that a billion here and a billion there and sooner or later you’re talking about real money, but a trillion is still a big number. Whether it occurred to you or not that there may be about $140 trillion of investable assets in 2025, you have to concede the possibility that, from the perspective of investable assets, questions around the ESG-focused investment could be meaningful.
Political Pushback and ESG Investing
At the same time, the political pushback on the notion of ESG investment is growing. A December 19, 2022, New Yorker article profiling Vivek Ramaswamy, who laid out the Republican critique in political terms in a book last year called “Woke, Inc.: Inside Corporate America’s Social Justice Scam,” says that Ramaswamy’s innovation:
is to place E.S.G. investing at asset-management firms like BlackRock, Vanguard, and State Street at the center of what ails American life. He calls this kind of socially conscious investing — not political corruption or dark money, not election denialism, not disinformation — the gravest danger that American democracy faces today. E.S.G., he told his audience, ‘let the private sector do through the back door what our government couldn’t directly get done through the front door.’
This is not a new argument. As we will see in a few minutes, it is the same argument that was made a little over 50 years ago to great practical effect.
Four Aspects of the ESG Data Problem
So, in dollar terms and in political terms, this note is not of purely theoretical or academic interest.
Getting to the argument, then, after a short introduction about what I mean by ESG, I am going to first present some thoughts about issues with data quality in ESG. There has been a lot of public discussion about these multi-dimensional issues. Accordingly, I will only provide a little update on some of what I think are the most interesting things going on in this area. There is a lot going on. So, I am not intending to present a full survey or an in-depth depth summary. Rather, I have selected four topics, representing what I think are four distinct interesting aspects of the ESG data problem:
the ESG ratings divergence issue,
the impact-weighted accounting project at Harvard Business School,
the Private Equity ESG Data Convergence Project, and
the SEC’s climate change disclosure regulations.
ESG a Partisan Political Issue
Following that review, I argue that the fact that there is so much work that needs to be done on these issues and other ESG data issues facilitates making ESG a partisan political issue. The ESG idea threatens the economic positions of players in parts of the economy. To be explicit, it is not clear how some of those players would land when the dust settled if ESG proponents had their way. But the ESG idea is a threat. It is an argument that we need to change, and change is unsettling and costly. So, it is obvious that there would be pushback, and the issue is thought to be big enough that the big political guns are coming out. It seems unlikely to fizzle as a political issue in the current environment.
The Political Context of How Businesses Operate
Finally, I will argue that the politicization of ESG issues will impact corporate governance in important ways. The political context in which businesses operate impacts how they operate, in both broad and narrow ways:
First, from a broad perspective, there are persuasive arguments that differences in corporate governance structures around the world are, in part, a consequence of differences in political context. For example, in countries in which we see relatively heavy involvement of politicians, and particularly of political labor movements, in business, we tend to see more concentration of ownership in public companies and fewer public companies. The correlations appear to be very strong. We have already seen increasing concentrations of ownership among public companies in the U.S. for many years. The political trends relating to ESG will likely reinforce those trends.
Second, from a narrow perspective, we can expect that business decisions in the U.S. will be subtly impacted by political considerations. CEOs operate in a political environment, and the political consequences of their decisions have business implications. You can think about the Disney situation, which was stark, or the parade of CEOs in different industries that are called on to face political questioning in Congress, or the potential policy implications of being in favor, or out favor, from a regulatory perspective in any given administration. Think, for example, about antitrust enforcement policy in the Trump administration.
So, to repeat, my basic proposition is that the large challenges around ESG data have contributed fundamentally to the politicization of the ESG debate, and the politicization of the ESG debate will likely result in corporate governance impacts that have broad consequences for business.
What “ESG” Means
With that outline, I want to move on to the preliminary question of what I mean by “ESG”. The phrase is used in different ways, of course. In fact, there is a fair amount of discussion today about what “ESG” means, and whether it is the same or different from “sustainability” and “corporate responsibility”.
Externalities
What I mean is the idea that a business should take into account indirect and long-term impacts on its value attributable to externalities. By externalities, what I mean is impacts on the environment and on society for which the business is not legally responsible and which the business cannot own. While “externalities” are impacts that a business is not responsible for and cannot own, a business can be impacted by its externalities, sometimes in the short term but often in long-term and indirect ways that are difficult to value.
This is not a novel definition. Indirect and long-term impacts of externalities are harder to take into account than direct and immediate impacts. But that doesn’t mean that they should be ignored. Businesses should act responsibly, which means executives not ignoring externalities simply because they can be ignored. If everyone ignores externalities, problems compound, for society and the economy as a whole, including for the businesses creating the externalities.
Hard to Define and Measure
This is a classic “tragedy of the commons” issue. There are traditional ways to address some problems of collective action. For example, some have argued that incentivizing executives to be responsible can contribute to the solution of some climate change problems. Some businesses have started down that road. That is a hard fix, in my view, for pretty much the same fundamental reason that a lot of ESG issues are hard – the data problem. If it is hard to define and measure success on an issue, then compensating executives based on that issue is fraught with conflicts of interest, and the potential of abuse and unintended consequences.
Debatable Definition
The fact that the definition of ESG itself has become debatable illustrates the basic data problem. Businesses, politicians or others who argue that ESG is a ruse or a fraud to promote liberal ideology are saying, in effect, that there is no problem to be solved. Data supporting the opposite view, and detailing the magnitude and specific causes, nature and consequences of the problem, is necessary to refute those arguments.
I want to touch on three additional preliminary points quickly.
Government or Private Sector
First, rather than saying that the ESG idea is a ruse or a fraud, one could argue that ESG advocates have identified very real problems that require collective action solutions, but business should not be part of those solutions. Ramaswamy makes that argument. As quoted in the same New Yorker profile I referred to earlier:
“It’s not a right-leaning issue, it’s not a left-leaning issue,” he said. Private-sector attempts to address climate change are not only laughably insincere, he argued; they’re encroaching on work that should be done by the government—and only if the citizens agree.
So, Ramaswany makes the argument that ESG problems are the responsibility of the government, not the private sector to solve. He says that they are political issues: “only if the citizens agree”. Unfortunately, he makes this point in a sentence that is incoherent: his argument is that the problem doesn’t exist, and it should be solved by the government.
Not Necessarily Inconsistent
But the argument that social problems are the responsibility of the government and not the private sector is not new. It has been common wisdom for 50 years that “there is one and only one social responsibility of business—to . . . increase its profits”. That statement, by Milton Friedman, of course, has given rise to the idea of “shareholder primacy”, which is largely understood to mean that a company should always and only act in the interest of increasing stock value. Note that Friedman’s statement and my definition of ESG are not necessarily inconsistent. Friedman says that the one responsibility of business is to increase its profits, and I say that ESG is about taking into account certain impacts of certain conduct on a business’ stock value.
Shareholder Primacy and Stakeholder Capitalism
But there is a perception in practice that shareholder primacy and stakeholder capitalism are inconsistent ideas. That perception is, I think, also in large part a data problem. If we can’t show that being responsible about externalities is good for stock value, then politicians and others can say that doing so is a backdoor way to get businesses to become woke.
By the way, Friedman’s statement quoted above was not a statement about business management or economics, it was a statement about politics. His argument, which is fully developed in a book called “Capitalism and Freedom”, is that if business is responsible for social outcomes, then we will lapse into a collectivist political system. It is the same argument that Ramaswamy is making now. That may have been a persuasive argument in 1970, 20 years before the collapse of the Soviet Union, but it’s not persuasive today around the question of whether businesses should act responsibly about ESG. Even if there is a slippery slope at play, when it comes to businesses acting responsibly about the climate and social issues, we are on the baby part of the slope, and there’s plenty of room to stop before we get to the edge of a cliff.
Short Term and Long Term Impacts
Second, are the impacts of externalities on businesses too small and remote for businesses to worry about? They are usually too small and remote in the short term to have much of an impact. But the question of whether they are too small and remote and long term is exactly the issue that we lack the measurement data to be able to answer.
Anyone’s Interest
Third, there is a legal argument that any kind of stakeholder perspective on corporate governance makes it impossible for courts to judge whether corporate directors have acted properly. In sum, the argument is that the courts must have a frame of reference and that frame of reference is the interest of stockholders. If a plaintiff can argue that a board’s decision was a waste of money from the perspective of a stockholder, then the court can say that the board’s conduct was wrong, and can assign responsibility. If anyone’s interest can be taken into account, the argument is that there is no basis for such an assessment.
That’s a good argument, in my view. It is an argument that has merit and deserves careful consideration. But if board decisions are in furtherance of ESG interests, and if the decisions are not affected by conflicts of interest and are taken with due care and in good faith, and if ESG considerations are in the interest of stockholders, then the traditional corporate law analysis, which puts stockholder interests at the center of questions about board conduct, continues to work. In that framework, we are still saying that board conduct should be measured, in the usual way, against the well-established standards of the corporate waste and business judgment rule principles.
Ratings Divergence
With all of that background, let’s get going with the first topic, ratings divergence.
“Ratings divergence” refers to the fact that six important ESG ratings agencies have been shown in a 2016 academic article to assign very different ESG scores to the same businesses. The article argues that if the six rating agencies assign very different scores to how well a business performs from an ESG lens – with the same business performing very well according to some raters and very purely according to other raters – what does that say about the validity of the ratings?
For reference, by contrast to ESG ratings, when the principal debt rating agencies – S&P and Moody’s – rate issuers of debt on their ability to repay, their ratings converge about 99% of the time.
The authors of the 2016 article posit two potential explanations for the ratings divergence they found. One explanation is that the raters assigned different benefits to different types of conduct. For example, if one rater believes that X helps the environment and another rater believes that Y helps the environment, then the raters would assign different performance ratings to a company that does X but not Y. The second explanation is about differences in measurement. Assume both raters have the same view that X helps the environment, but they measure a company’s performance in X differently.
The authors’ bottom line conclusion is that both explanations contribute materially to the divergence in ratings:
Raters continue to have low agreement even when we adjust for explicit differences in what they say they are trying to measure. When commensurability is low, then all or most raters have high measurement error when trying to measure similar theoretical constructs. These results call into question the validity of social ratings, which impact managerial actions around the world, guide trillions of dollars of investment, and inform scholarly perspectives on corporate social responsibility.
Three Sources of Divergence
A follow-up 2022 article article, called “Aggregate Confusion: The Divergence of ESG Ratings”, by different authors, confirmed the 2016 conclusion that the ratings of different raters diverged substantially, concluding the correlations between ESG ratings range from 0.38 to 0.71. Those are low correlations. The 2022 article attributed the divergence to three sources, the two referred to by the 2016 authors plus one additional smallish issue:
scope divergence, which refers to the situation where ratings are based on different sets of attributes, contributing 38% of the divergence. One rating agency may include lobbying activities in its governance assessment, while another might not, causing the two ratings to diverge.
measurement divergence, contributing 56% of the divergence, refers to a situation where rating agencies measure the same attribute using different indicators. For example, a firm’s labor practices could be evaluated on the basis of workforce turnover or by the number of labor-related court cases taken against the firm.
weight divergence, contributing 6% of the divergence, emerges when rating agencies take different views on the relative importance of attributes. For example, the labor practices indicator may enter the final rating with greater weight than the lobbying indicator.
Addressing the Problem
This data issue seems huge to me, because it is so easy to use it to cast doubt on the whole ESG enterprise. It suggests a randomness to the ratings and analysis that rhetorically supports the allegation of a fraud or ruse.
A 2019 article from a group at the Harvard Business School, which identifies other factors that contribute to ratings divergence than those referred to above, importantly asks what can be done to address the problem:
Companies should ‘take control of the ESG data narrative’ by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should ‘customize’ their metrics to some extent, while at the same time seeking to self‐regulate by reaching agreement with industry peers on a ‘reasonable baseline’ of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.
Those actions seem like a good list, but they unfortunately seem a bit aspirational and that this ratings divergence issue will linger.
Measuring Externalities
I turn now to the second of my four data topics. I am moving now from the raters to the corporations themselves. This topic is about the fact that we do not yet have any accounting methodology to measure the impact of corporate actions affecting ESG issues. To go back to my definition of ESG, we have no approach to measuring the externalities, whether they are negative or positive.
We have GAAP to tell us how to measure financial impacts. GAAP is a mystery to many, but my guess is that many casual bystanders assume that there are no judgments to make in measuring financial basics. Revenue and net income define themselves, right? The answer is that they do not. There are judgments to make, and GAAP tells you how to do it in a way that will satisfy the SEC.
If we are going to account for ESG impacts, we need something similar for non-financial impacts of the type that fall under the ESG umbrella. For about 10 years we had something like that – the work product of the Sustainability Accounting Standards Board or SASB. It sounds like FASB, but with an “S”. Its mission was:
to establish industry-specific disclosure standards across ESG topics that facilitate communication between companies and investors about financially material, decision-useful information. Such information should be relevant, reliable and comparable across companies on a global basis.
The IFRS Foundation
To be clear, the SASB’s very valuable contributions differed from what GAAP does. SASB’s work helped companies and investors understand what could or should be financially material externalities for different types of businesses. It gave suggestions for how to measure those externalities, but did not go so far as to promulgate uniform standards. In any case, in 2021 SASB combined with a few other organizations under the IFRS Foundation. The focus of the combined organization continues to be on making disclosure standards more uniform.
Impact-Weighted Accounts Project
However, there is a very interesting newer project that is focused on the accounting or measurement principles that should underlie that uniform reporting. It is called the “Impact-Weighted Accounts Project” and it is being run out of Harvard Business School. The mission of the Impact-Weighted Accounts Project is:
to drive the creation of financial accounts that reflect a company’s financial, social, and environmental performance. Our ambition is to create accounting statements that transparently capture external impacts in a way that drives investor and managerial decision making.
For those interested, there is a website. A good introductory article, which his accessible through the website, is called “Impact-Weighted Financial Accounts: The Missing Piece for an Impact Economy”. This is a huge project, although probably not as big as GAAP was for financial accounting. In case you’re wondering, it took about 30 years, beginning in 1939, to develop the accounting framework that we know as GAAP. It probably should not take the same amount of time for ESG accounting principles to be designed, but it’s not going to happen in the next few years.
This effort highlights that a problem with ESG data is that we still do not have a robust framework for accounting for the relevant externalities. We will not have it soon enough for political purposes.
Private Equity ESG Data Convergence Project
The third of my four ESG data topics supports that such a framework is needed. This topic concerns a different project that was started in 2021 as a collaboration between large institutional asset owners and private equity sponsors. It is called the “Private Equity ESG Data Convergence Project”.
The Data Convergence Project arose in order to address the fact, as summarized on the project’s website, that a:
lack of quantitative, comparable, longitudinal and meaningful ESG data/benchmark in Private Equity has made it impossible for investors to assess ESG progress and burdensome for companies to report on.
The Project’s stated goal is:
to create a critical mass of meaningful, performance-based ESG data from private companies by converging on a standardized set of ESG metrics for private markets. The standard can allow GPs and portfolio companies to benchmark their current position and generate progress toward ESG improvements, while enabling greater transparency and more comparable portfolio information for LPs / Investment Managers.
The Project has generated a lot of participation. According to the website, there are “currently, 250+ total members (160 GPs and 92 LPs/IMs) [who] have committed to the [Project], representing ~$25T USD of AUM worldwide.”
The members of the Project explicitly state that they intend to start slowly, with a limited number of ESG categories for which they will try to develop uniform reporting metrics and standards, which may be expanded in the future. The categories so far are: GHG emissions, renewable energy, diversity, work-related accidents, net new hires and employee engagement.
Value or Marketing Necessity
A quick take on this project might be that it suggests that a significant number of private equity sponsors are buying into the idea that ESG ideas can add value, and a cynic would reply immediately that the inference would be naive. Instead, mirroring some of the criticism in the public company sphere, a cynic might argue that the Project is a marketing necessity: private equity raises capital from limited partners; limited partners believe in ESG for whatever reason, therefore private equity must find a cost-efficient way to report good ESG data to their customers.
Countering the Cynical Perspective
Countering the cynical perspective, an analysis by the Boston Consulting Group for the Project contains one interesting conclusion in particular, in a report that was overall positive about the early stages of the Project. The conclusion was that:
as industries transition towards more sustainable and inclusive business models, BCG believes that those private equity funds that actively invest in driving ESG improvements ahead of the curve will likely see significant financial returns from these investments. For example, while it is too early to draw definitive conclusions from the benchmark, it is worth noting that revenues at private businesses with at least one woman on their boards have been growing at 13% a year over the past two years, compared to just 9% at companies with none. This correlation is in line with similar findings among public companies. For example, a study by Credit Suisse found that companies with at least one female board member generate slightly higher returns and profits owing to the greater diversity of perspectives and better decision making that results. In the coming years, as the ESG Data Convergence Initiative continues to collect data, it will enable more robust analysis of the relationship between ESG and financial metrics.
The SEC’s Proposed Climate Change Disclosure Rule
The last of the data topics that I want to touch on is the SEC’s proposed climate change disclosure rule. This topic is different from the others for a few reasons. First, this is a government rule, not private efforts like the other three topics. Second, it is focused on an important but narrow slice of ESG – climate change. Without diminishing the importance of the topic, I note that it does not cover even close to the full range of environmental issues under the ESG umbrella, such as the recycling issue, much less any non-environmental issue under the ESG umbrella.
For those of you who have not been following the SEC’s proposed new climate disclosure rule, it requires significant new disclosures for public companies on GHG emissions and climate change risks, including a new financial statement footnote that would be part of companies’ audited financial statements.
Delayed Rule
It was proposed in March, with adoption of a final rule expected a few months ago. The final rule was however delayed for a few reasons. It is almost certain that when the proposal is adopted in final form its entire validity will be challenged in court as exceeding the SEC’s statutory authority. The challenge will probably rely heavily on the Supreme Court’s 2022 decision in the EPA v. West Virginia case. In that case, as some of you will recall, the Court took the view that when a government agency seeks to decide an issue of “vast economic or political significance,” a vague or general delegation of authority from Congress is not enough. The Supreme Court held in EPA v. West Virginia that the delegation of authority must be specific and clear.
There are good arguments supporting the view that the SEC’s proposal is well within the SEC’s delegation of authority from Congress, but it is easy to see the current Supreme Court taking the opposite view.
Multiple Standards and Frameworks
Clearly alluding to the data limitations addressed above, the very first paragraph of the introduction to the SEC’s proposed rule states that:
the disclosure of this information would provide consistent, comparable, and reliable—and therefore decision-useful — information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.
The SEC proposal includes extensive discussion of the multiple standards and frameworks that have arisen over the last decade concerning GHG emissions and climate change risks. In fact, it is a good reference source if you are trying to make sense of the alphabet soup of standards and frameworks that are out there. However, it makes the point clearly that the standards and frameworks, while useful, do not provide decision-useful information, because the data is not consistent, comparable and reliable.
In sum, I hope that the foregoing provides a little update on four interesting ESG data topics, and gives an overall sense of how much work there is to be done regarding ESG data.
Political Crossfire
I now turn to the political crossfire in which the ESG idea finds itself. Again, there is not enough time to go into any real detail about the politics of the issue, but the basic debate should be familiar. I found a little excerpt from a 2022 Heritage Foundation blog post – titled “Woke Corporate Capitalism – What is the antidote to this “corporate wokeness” infiltrating our largest American companies?” – that seems to quickly but fairly summarize the current, early-stage, political dynamic:
Doescher: This is about those helping lead the charge against more and more conservative ideas. Corporate America . . . . The one thing that keeps going in my head is, “How come the left always gets their issue championed by big corporations? How come it’s always the left’s issues that get championed? How come there aren’t corporations standing up and saying, ‘Hey, abortion is terrible. It’s a bad thing?’ You just don’t hear that. You don’t see that. Maybe that’s just because we’re not being loud enough.
Olivastro: I think there was an assumption for a long period of time that the boardrooms of corporate America were largely aligned with what might be traditionally conservative or Republican issues. And whether that was once true or not, it is no longer the case.
Views and Consequences
These views are not isolated and they are having real consequences. Almost 20 states have some kind of anti-ESG rule in place. These fall into two categories: rules that prohibit the state from contracting with investment managers that support ESG and rules that prohibit ESG-based investment strategies by public pension and other funds. On the side of the aisle, about 10 states have some kind of rule facilitating ESG-focused investment.
DeSantis and Disney
Nothing about these situations suggests that these issues will fade. As another data point, recent reports suggest that the fight between Florida governor Ron Desantis and Disney is far from over. As reported by the Washington Post:
Florida Gov. Ron DeSantis (R) signaled Friday he plans to ask state officials to exert control over special local government powers once held by Disney World — a fresh sign that last year’s fight over talking about LGBTQ issues in Florida’s schools is far from over. A notice published on a Florida county government website said state lawmakers would be asked to vote during the upcoming legislative session on increasing the state’s oversight of the taxing district that governs Florida’s largest theme park.
Favorable Impact
That takes me to the last part of this, concerning the impacts on corporate governance of the politicization of the ESG issue in the absence of data that could more persuasively address the policy issues. To be clear, there is little reason to believe that data would resolve debate, but it could favorably impact the nature of the discussion, affecting the impact on corporate governance that I discuss below.
A Tailwind to the Trend
The political dynamic will provide a tailwind to the trend we have seen for many years of increasingly concentrated stock ownership in the U.S. public markets. Increasing concentration of ownership will have uncertain implications for corporate governance.
On the one hand, recent trends in ownership concentration in the U.S. are largely attributable to the ongoing shift of capital from actively to passively managed funds. A 2019 article (here) predicted that three large index fund managers – Vanguard, Blackrock and State Street – may cast as much as 40% of the votes in S&P 500 companies within two decades.
On the other hand, there is a well-developed literature around the idea that political context affects concentration of ownership. The basic dynamic is that where political agendas strongly affect business, concentration increases. In the U.S., with a culture that has historically involved relatively little interference by government in the private sector compared to the rest of the world, share ownership has been relatively diffuse. Aligning the interests of diffuse shareholders and managers has been central to American corporate governance, but it has been achieved through means such as the use of stock-based compensation. In Europe, by contrast, ownership is relatively concentrated, in significant part because in continental Europe in the late 20th century politics can press managers to stabilize employment, to forego some profit-maximizing risks, and to use up capital in place rather than to downsize when markets no longer are aligned with the firm’s production capabilities. These may not be in the interest of shareholders, and so concentration of ownership is presumably a response to enhance alignment of management with shareholders (rather than the government). As summarized in one recent article:
When we line up the world’s richest nations on a left-right political continuum and then line them up on a close-to-diffuse ownership continuum, the two correlate powerfully. . . . These results strongly suggest that the corporate governance and ownership characteristics are linked, directly or indirectly, to basic political configurations in the wealthy West.
Increasing Concentration
So, we have two dynamics resulting in increasing concentration. However, that concentration may be in the hands of passive index asset managers. The role of passive index asset managers in corporate governance has been idiosyncratic. They are conflicted both by the fact they are required to own the index, and so arguably have a lesser incentive to favor aggressively competitive strategy, and because they are by definition not stock pickers and therefore have a relatively lesser focus on individual corporate strategies than other owners might. Blackrock’s CEO Larry Fink has been outspoken about ESG. Vanguard, less so. State Street has been selective in picking its issues.
Results
As a result, with concentration of ownership being likely to increase as a defensive reaction to political dynamics, but the concentration likely to focus governance in the hands of passive index asset managers whose influence in governance matters is not based clearly on straightforward economic interests, it will be interesting (in a somewhat unfortunate way) to see how those developments play out.