ESG movement origins trace back to financial crisis, Citizens United

Justice Alito's language in Hobby Lobby case gave shareholders an opening

Justice Samuel A. Alito Jr. wrote the decision in the 2014 Hobby Lobby case.  (Erin Schaff/The New York Times file photo)
Justice Samuel A. Alito Jr. wrote the decision in the 2014 Hobby Lobby case. (Erin Schaff/The New York Times file photo)
Posted July 22, 2021 at 7:00am

The exponential growth of investment focused on environmental, social and governance factors that has unexpectedly aligned many progressive-backed policies with corporate agendas can be traced at least in part to a Supreme Court decision derided by Democrats: Citizens United, according to a legal scholar.

The 2010 high court rulings in Citizens United v. Federal Election Commission and in Burwell v. Hobby Lobby Stores Inc. four years later recognized a corporation’s right to assert the political views and religious beliefs of shareholders. Those decisions, coming in the aftermath of financial and environmental catastrophes, sparked the rise in shareholder activism that is reshaping global financial markets, said Kent Greenfield, a professor at Boston College Law School.

“The global financial crisis, the Deepwater Horizon [offshore oil platform] disaster and Citizens United all came together at a crucial moment, and people started questioning the notions that markets will always work or that corporations will act in society’s best interest,” Greenfield said in an interview with CQ Roll Call. The idea that corporations were corrupting politics in the wake of Citizens United also “gave it a lot of traction,” he added.

Corporations have certain rights, according to Greenfield, including access to courts, due process and freedom from government intrusions like uncompensated takings of property or warrantless searches. Corporate speech, he has argued in his scholarship, should be limited to fulfilling a business purpose.

These rights must also come with responsibilities that include a duty to consider broader public interests, Greenfield said, adding that concepts of corporate responsibility to the public, and even to shareholders, have evolved in the law over time.

“It’s fair to say that during the middle part of the 20th century, there was a sense that corporations were governed by managerial prerogative, and managers were given a lot of deference by courts,” Greenfield said.

Companies weren’t yet thinking globally, but they sometimes felt obligated to support the local community’s interests.

“By the 1980s corporate takeover era, courts were deciding that shareholder value should be the guiding principle — at least as far as takeovers,” Greenfield said.

“The Reagan era reinvigorated a fear of overregulation,” he said. “During the 1980s, and through the ’90s, there was a sense within both laws and norms that corporations should be more attuned to Wall Street and the shareholders.”

“A company that wanted to be more humanitarian-minded would have really had to buck the norms back then,” he said, pointing out there wasn’t even much litigation over these issues at the time.

“It’s not just law, it’s the market,” Greenfield said. Governance “has always been bounded by the market.”

By the late 2000s, Greenfield said, more people had begun advocating for companies to adopt broader concepts of social responsibility. Many were also reconsidering the old legal notions of “shareholder primacy” by that time, he said.

Turning point

Justice Samuel A. Alito Jr. authored the decision to uphold Hobby Lobby’s policy against providing employees access to birth control coverage, which was rooted in the owners’ religious beliefs. In the 2014 ruling, Alito made arguments used by today’s ESG-focused shareholders, even if they don’t reach the same conclusion about religious objectives.

“While it is certainly true that a central objective of for-profit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so,” Alito wrote. “If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well.”

In 5-4 decisions in both Citizens United and Hobby Lobby, along partisan lines, the justices borrowed the other side’s usual arguments about a corporation’s responsibility to shareholders.

Justice John Paul Stevens, perhaps the court’s most liberal member at the time, argued in dissent in Citizens United that corporate free speech should be limited to protect investors.

“The structure of a business corporation, furthermore, draws a line between the corporation’s economic interests and the political preferences of the individuals associated with the corporation; the corporation must engage the electoral process with the aim ‘to enhance the profitability of the company, no matter how persuasive the arguments for a broader or conflicting set of priorities,’” Stevens wrote, quoting from long-standing corporate governance principles.

“Conservative justices in those cases argued for a broader stakeholder consideration, while the liberals argued for shareholder primacy focused on profit-seeking,” Greenfield said in the interview.

Greenfield recognized a danger in the expansion of a corporation’s right to express its shareholders’ views, as broadly defined in Citizens United, Hobby Lobby, Masterpiece Cakeshop Ltd. v. Colorado Civil Rights Commission and similar cases. Shareholder pressure is now driving mostly beneficial policies, but they could be wielded in discriminatory ways too, Greenfield warned.

“These cases together could be used to uphold discriminatory corporate policies that are rooted in religious belief,” Greenfield said. “It’s not clear corporations would lose those cases.”

Laws and norms

Greenfield used to believe any embrace of broader corporate social responsibilities would come only through legislation but admitted he had been surprised the movement has grown so quickly and powerfully through shareholder activism. Some $35.3 trillion has been invested in sustainability strategies alone as of last year, according to a report by the Global Sustainable Investment Alliance.

Legislation will eventually be needed, Greenfield said. State laws govern the role of corporations, and federal policymakers have authority over publicly traded companies. That’s why some presidential candidates — including Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass. — included reforms around corporate responsibility in their platforms, he said.

Companies will change based on both laws and norms, Greenfield said. At the moment, businesses are starting to respond to different norms being set under increased shareholder pressure, but legislation is necessary to make it lasting, he said.

Lawmakers will eventually have to define the role and responsibilities of corporations in the modern public sphere, especially to combat longer-term problems that can stretch beyond the typical time horizons considered by management, Greenfield said.

He noted the irony that the Citizens United and Hobby Lobby decisions were mostly decried by Democrats, but progressive-minded lawmakers could have used them to push legislation to define corporate responsibilities that accompany corporate rights under the law.

“Without regulation, it is unclear to me how a corporation could ever be convinced to consider something that could happen in 20 years,” he said. “It’s a difficult argument to make.”