Why Shareholder-Driven Corporate Social Responsibility Failed

A decade ago, hopes were high in some circles that pressure from the new, large, economically-powerful institutional shareholders, like BlackRock, for more corporate social responsibility—on issues like climate change, the environment, and justice—would become a major feature of the corporate landscape and move the American corporation to do what government was not doing. That hope arose because incentives emanating from America’s shareholding structure had shifted when firm-by-firm investments by large shareholding institutions evolved to market-wide, across-the-economy investments in very large portfolios. Institutional investors of this sort no longer picked stocks; they invested broadly across the stock market and the American economy. In some circles that ownership structure looked to be creating incentives for financial institutions with wide ownership to pressure the American corporation to benefit the economy overall, and not just boost the profits of their portfolio companies. In CSR circles, hopes were high that the new universal owner had incentives to fulfill social responsibility gaps seen as having been left by government.

For example, investors with across-the-economy ownership had more reason to make their companies internalize externalities; if one firm in the portfolio profited at the expense of another firm, the new investor’s profit in one would be offset by the loss in the other firm. And turning from government regulation to private pressure was needed, said many analysts and activists, because of our broken government. With deadlocked government a dead-end, the CSR and ESG movements sought to pressure large institutional shareholders in corporate America toward social progress.

Many in the new shareholder class of universal owners indeed bought into the new corporate social responsibility playbook and pressed corporate America for more socially responsible action.

That effort failed in the first half of this decade. In Why Shareholder-Driven Corporate Social Responsibility Failed, I analyze the effort’s legal and political premises to see why its odds of success were daunting from the start, with the early hopes for success unrealistic.

Its political failure was embedded in its foundational premise, namely the starting thought that dysfunctional government by itself left, and still leaves, a large opening for transformational, shareholder-induced CSR. That premise was as largely unquestioned thus far as it was incorrect—incorrect because the political forces that defeated direct governmental action constituted latent political forces that could, and did, galvanize political players into action to defeat and reverse the 2010s’ private CSR successes—once they became prominent.

This new economically powerful class of CSR-favoring stockholders could not escape the governmental result and the polity’s underlying gravitational pull just because they—the institutional investors—turned away from government. If governmental brokenness came from interest group opposition or unsympathetic voters (instead of being just unable to act), then that same opposition posed a latent problem for stockowner-produced CSR. As soon as CSR proponents made progress using private shareholder pressure, as they did initially in the 2010s, latent political opposition turned into action, halting and even reversing initial private CSR successes, as it did in the 2020s.

Private CSR pressure did not, and could not, successfully push social results indirectly through the corporation much further than government had pushed them directly. If political opposition to the CSR agenda blocked Congress from marching down the direct route, then that same political opposition was poised to prevent the indirect route through corporate America.

An example: Climate activists seek to cut carbon emissions, and a stiff carbon tax would help do that. But because a carbon tax (the direct action) has been politically unattainable, prosocial shareholders pressure the corporation to emit less carbon, push for corporate carbon impact statements, and seek embarrassing corporate disclosures—the indirect action. But if a polity refuses to enact a carbon tax, is it likely to stand by while institutional shareholders push the corporate sector to become strongly carbon-averse? The oil interests and American car drivers (and voters who do not believe climate change to be that big a problem) barred the American polity from enacting a direct carbon tax. They constituted a latent coalition, one potentially opposed to CSR pressure seeking similar ends.

Oppositional forces lay dormant when initial CSR pressure was felt. But meaningful—or at least visible—private CSR success could activate that latent opposition, and it did. CSR activism sought to escape the polity by privately pressing on the corporate economy, seeking transformative change. But CSR activism cannot easily escape the unfavorable political forces that induced CSR proponents to turn from direct political action in the first place.

There are abstract counters to this explanation. This political hurdle—doing privately what cannot be done publicly can face the same political opposition—can be overcome and has been in other political movements, but thus far has not been here. Social movements can change public opinion, but thus far has not in this domain. Small victories might be good enough and stepping stones to bigger victories; but so far small victories seem to have been just small victories—or activated opposition forces without providing stepping stones.

Overall: shareholder-based CSR thinking has not overcome a basic hurdle, namely that the forces that defeated the direct social legislation in the first place are forces that can cut down and reverse private shareholder pressure for corporate social action later on, and have tended to do so when that private action progressed. Considerable academic debate has been had on how (and whether) corporate purpose should be more than shareholder value, with a normative focus on whether the large corporation should be responsible for public-regarding outcomes beyond those mandated by social, environmental, and other regulations. The inquiry here is different. It’s on whether corporate purpose can go much farther than the polity would go on salient social and political issues. Once the firm takes on broader aims than profit, can it sustain that effort in the polity, particularly if the polity had already turned against directly regulating such matters? For CSR in the 2020s, the answer is no.

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Much CSR and ESG thinking focuses on what’s morally or economically right, not on strategically potent factors—namely, CSR’s underlying, politically-induced instability that can render even satisfying successes short-lived. Broken, dysfunctional American government—and an American tradition of leaving the private sector alone—makes privately-produced, shareholder-induced CSR appear to be viable, with a fighting chance to push forward privately, even after public political reversals. But the corporation is not outside that political system. Consequently, even private CSR efforts must surmount political opposition—the same opposition that blocked direct government action in the first place.