Stakeholders and Stakeholder Activism

By David Larcker and Brian Tayan

Date: Feb 25, 2026

Sample Chapter is provided courtesy of FT Press.

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The governance mechanisms discussed in this book so far have been considered from a shareholder-centric perspective. A fundamental premise throughout is that the primary purpose of a corporation is to create value for shareholders and the obligation of a board is to ensure this purpose is achieved. Chapter 3 outlines board operations and fiduciary duties from this standpoint. Chapter 6 evaluates strategy development and risk management with this objective in mind. Chapter 11 accepts the premise that an effective market for control facilitates the transfer of corporate assets to owners that will derive the highest value from them. Many of the empirical studies discussed in this book measure the effectiveness of governance mechanisms by their impact on shareholder value and corporate profitability. In addition, the central definition of corporate governance that we employ—that a separation between the ownership of a company and its management creates opportunity for self-interested managers to take actions that benefit themselves at the expense of shareholders—is rooted in the premise that preserving shareholder value is a primary objective.

An alternative viewpoint also exists—that a corporation should exist not just to increase value for shareholders, but also to address the needs of other (non-shareholder) stakeholders. These stakeholders include employees, trade unions, customers, suppliers, local communities, and society. In this chapter, we examine the stakeholder perspective in depth. We start with an overview of the pressures that corporate managers have faced to incorporate stakeholder objectives into their planning, including pressure from their own shareholder base. We discuss the legal and economic implications of a stakeholder-centric governance model, including its potential impact on strategy, risk, and value creation. Then we examine how corporate managers and directors view their obligations to stakeholders and discuss the trend of CEO activism on social issues. We end with a discussion of the metrics used to track a corporation’s progress toward achieving social goals—including those developed by third-party rating providers—and their effectiveness.

As we will see, managing a corporation from a stakeholder perspective is not a simple undertaking. Indeed, it highlights a fundamental tension that has long existed in corporate boardrooms: how to balance competing interests to ensure the success of the organization over the long term.

Pressure to Incorporate Stakeholder Interests

In 1970, economist Milton Friedman famously asserted that a company’s only social responsibility is to maximize shareholder value. He argued that corporate executives are employed by the owners of the firm (shareholders) and that their obligation is to manage the business in accordance with the wishes of their employer—that is, to increase its value under the constraints of the law and accepted ethical standards. When other purposes are added to the equation, they require trading off this objective by diverting resources to a purpose that the owners of those resources have not approved, with the costs being borne by shareholders (through lower profits), customers (through higher prices), and workers (through lower wages and employment). Given these trade-offs, Friedman argued that corporations should focus on value maximization (which they are good at), and society should allocate the value however it sees fit.¹

Despite Friedman’s argument, pressure has grown on large, publicly traded firms to incorporate stakeholder interests into their long-term planning. Although not an exhaustive list, the roster of stakeholders includes employees of the firm, customers, suppliers, creditors, trade unions, local communities, and society at large. The interests of these groups are broad, including environmental sustainability, reduction of waste or pollution, higher wages, workplace equality, diversity, providing access to groups that cannot afford products or services, and being a responsible counterparty or local citizen. Because companies operate in different industries, stakeholders and stakeholder interests differ across corporations. When we talk about stakeholder interests, we generally refer to the most directly relevant issues—such as climate change for energy producers, product waste for goods manufacturers, or affordability for healthcare providers. In some cases, the social interest is assumed to be common across companies, with one example being diversity.

Various labels have been applied over time to describe corporate and investor efforts to address stakeholder needs. Some of these terms include socially responsible investing (SRI), corporate social responsibility (CSR), and environmental, social, and governance (ESG).

The pressure on corporations to address stakeholders’ interests has come from multiple fronts and has shown to both wax and wane in recent years:

• Money flowing into sustainable investment funds: In 1995, less than $1 trillion was invested with money managers and institutional investors dedicated to sustainable, responsible, and impact investing in the United States. In 2020, this amount peaked at $15 trillion; by 2024, it had declined to $6.5 trillion.²

• ESG-related proxy proposals: The number of shareholder-sponsored proxy proposals related to ESG considerations increased for a period of time but has since declined. Meanwhile, “anti-ESG” proposals have been put forth, which have also received low support.³

• Institutional investors: Large institutional investors that long took passive stances on ESG-related issues for a time became more assertive. For example, each of the “Big Three” index funds—BlackRock, Vanguard, and State Street Global Advisors—launched advocacy campaigns to shape the governance practices of their portfolio companies in areas relating to social responsibility. By 2023, they had pulled back from this advocacy. (We discuss this trend more fully later.)

• ESG metrics: Data providers use survey data and publicly observable metrics to rate companies along a variety of stakeholder dimensions. These data are sold to institutional investors to inform investment decisions or for use in magazine rankings. Examples of such data providers include MSCI, HIP (“Human Impact + Profit”), and TruValue Labs (available through FactSet). Examples of published indices include Barron’s 100 Most Sustainable Companies, Bloomberg Gender Equality Index, Ethisphere Institute’s Most Ethical Companies, and Newsweek Top Green. The Sustainability Standards Board (SASB) has tried to standardize the reporting of these metrics. (We discuss ESG measurement more fully later in this chapter and in Chapter 14.)

• Employee and customer activism: Employees of some companies have become more vocal in expressing their views to management on environmental or social issues. Social media and internal corporate communications platforms have facilitated this process. Employee activism has forced companies to change corporate policies, withdraw from commercial activities, and take public stances on social issues about which the company might have traditionally remained silent. At the same time, opponents of ESG, including certain customer groups, have pressured companies to set aside social policy stances as part of their activities (see the following sidebar).

Of these sources, institutional investors have played a particularly prominent role in promoting stakeholder interests. In 2014, Vanguard launched a program of direct engagement with portfolio companies to discuss governance-related topics. It dubbed this program “quiet diplomacy.” Vanguard subsequently included ESG criteria in this effort.⁷ In 2017, State Street Global Advisors launched what it called the “Fearless Girl” campaign to advocate that its portfolio companies increase the number of women on their boards.⁸

For a time, BlackRock was the most vocal of the Big Three investors in advocating that companies give greater consideration to stakeholder interests. For more than a decade, BlackRock CEO Larry Fink has written an annual letter to the CEOs of the companies in BlackRock’s investment portfolio, often encouraging them to address a variety of stakeholder-related issues. In 2016, he advocated they lay out “a strategic framework for long-term value creation” and stated that “generating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors.”⁹ The next year, Fink encouraged greater attention to “long-term sustainability” and discussed such topics as globalization, wage inequality, tax reform, and a more secure retirement system for workers.¹⁰ In 2018, he argued that a company needs to have a “sense of purpose” that serves all stakeholders and that “to prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”¹¹

In subsequent years, however, Fink shifted away from an explicit promotion of ESG. His 2023 letter avoided the term “ESG” entirely and mentioned the term “sustainability” only once.¹² In 2024, he omitted all references to ESG, DEI, and climate change—instead advocating for “energy pragmatism.”¹³ The company also removed previous letters from its website.

Because of the size and ownership positions of the Big Three, they are positioned to influence corporate practice. Gormley, Gupta, Matsa, Mortal, and Yang (2023) showed that the campaign launched by these funds to increase boardroom diversity in the United States led corporations to add 2.5 times as many female directors in 2019 as they did in 2016.¹⁴ The recent pullback in their advocacy likely has had a countervailing impact.

In response to pressure from stakeholder groups, more than 180 CEOs affiliated with the Business Roundtable agreed to revise the association’s statement on the purpose of a corporation, to emphasize a commitment to all stakeholders and not just shareholders. According to the association:

Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance that include language on the purpose of a corporation. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders. It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.

Under the revised statement, association members commit to:

• Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.

• Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.

• Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.

• Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.

• Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.¹⁵

We discuss the implications of this commitment next.

Legal and Economic Implications

It is not clear what tangible impact a commitment to stakeholders has on the manner in which a corporate director advises and oversees management and the corporation. Fiduciary duty under Delaware law requires that shareholder considerations be the primary focus, and the adoption of ESG-related principles does not change this priority.¹⁶ According to Delaware Supreme Court Chief Justice Leo E. Strine, Jr:

[A] clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.¹⁷

Similarly, former Chancellor William B. Chandler III of the Delaware Court of Chancery wrote:

I cannot accept as valid … a corporate policy that specifically, clearly and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its shareholders.¹⁸

Nevertheless, Delaware law does allow stakeholder considerations to be taken into account to the extent that they protect the value of a firm or decrease its long-term risk. According to Skadden Arps:

The shareholder primacy path does not preclude a for-profit company from taking social issues into account in the conduct of its business. What is required to stay on the path is that the company’s consideration of those social issues have a sufficient nexus to shareholder welfare and value maximization.¹⁹

When evaluating a stakeholder’s need, the board is expected to gather reasonably available material, evaluate the costs and benefits, and make a decision in a disinterested manner in the best economic interest of shareholders—just as it does in all other business decisions. The board’s decision then falls under the protection of the business judgment rule.²⁰

As such, it is not clear that the board of a company that explicitly adopts ESG-related principles can or would make substantially different economic decisions than a corporation that does not adopt these principles. For a board to make a decision that reduces economic outcomes for shareholders so as to benefit other stakeholders, a fundamental change to corporate law would have to occur. (Some politicians have advocated such a change.²¹) If the decision does not reduce shareholder outcomes, then it could be argued that the decision-making framework of a board that adopts ESG-related principles is no different than the standard decision-making framework that directors have currently and historically employed. In other words, ESG might just be a different strategic approach to achieving similar economic ends. The Business Roundtable statement cited earlier appears to walk this line when it says that the long-term interests of shareholders and stakeholders are inseparable, and the same is true for many ESG-related initiatives. (See the following sidebar.)

Corporate executives need to make rational strategic and investment decisions for both the short and long term.²⁶ The debate over ESG hinges somewhat on the time horizon that public company executives use to make those investment decisions (and, by extension, the board of directors that approves those decisions). ESG advocates contend that many companies, motivated by compensation incentives and shareholder activism, are too short-term oriented. They claim these companies do not make sufficient investments in important stakeholder groups (such as employees, customers, suppliers, or environmental preservation) because they are overly focused on quarterly profit maximization as a means to increase the current share price. As a result, their business model is presumed to be unsustainable: at some point in the future, this lack of investment will either lead to a deterioration in performance or contribute to a societal ill that the company is forced to redress through government action (an externality).²⁷ An important assumption underlying these arguments is that shareholders do not notice the damage being done to the company today and will bid up the stock price based on current earnings without accurately pricing in the long-term risk created by foregone investment.

The solution to the problem, when framed this way, is to create more sustainable companies. This explains in part the advocacy of BlackRock and its emphasis on “sustainable, long-term growth.”²⁸ It also explains the support for ESG-related initiatives by prominent corporate law firms such as Wachtell, Lipton, Rosen & Katz, which urges companies to reject a “short-term myopic approach” and embrace “sustainable improvements … [that] systematically increase rather than undermine long-term economic prosperity and social welfare.”²⁹

Unfortunately for those who want to resolve this issue, robust empirical evidence does not exist to evaluate the claim of whether CEOs are too short-term oriented. (We discuss the viewpoints of executives and directors on this question in the next section.) When Denis (2019) reviewed research evidence on shareholder investment horizon, shareholder activism, corporate investment, and shareholder reaction to corporate investment over a three-decade period, he concluded that “there is little systematic evidence to suggest that short-termism is a pervasive problem plaguing U.S. companies.”³⁰

The impact of a stakeholder orientation on corporate governance is also uncertain. Jensen (2002) argued that stakeholder theory allows managers to design their own objective functions and run firms in their own interests. In consequence, a stakeholder orientation has the potential to increase agency costs by replacing a measurable objective (shareholder value) with a less measurable objective (stakeholder value).³¹ Mehrotra and Morck (2017) argued that shareholder value maximization constitutes a bright line against which to evaluate performance, “whereas stakeholder welfare maximization is an ill-defined charge … that gives self-interested insiders broader scope for private benefits extraction.”³² Similarly, Bebchuk and Tallarita (2020) contended that a stakeholder orientation insulates management from shareholders, reduces accountability (by lessening financial performance as a disciplining mechanism), and harms economic performance. They concluded that a stakeholder orientation has the potential to be costly to shareholders, stakeholders, and society alike, and counterproductive to the objective of advancing the very interests that ESG advocates embrace.³³ Whether investors are willing to incur personal financial costs to advance ESG issues is an important but unknown question (see the following sidebar).

Note that these are theoretical arguments. Companies that adopt a stakeholder orientation are likely to do so for a variety of motives and will undoubtedly experience a variety of outcomes from their initiatives.

Director and CEO Views on Stakeholders

We have seen the pressures that companies face to adopt stakeholder-friendly initiatives and the legal and economic implications of these initiatives. What are the viewpoints of corporate directors and executives on this issue? Survey data suggest that they embrace the concepts behind advancing stakeholder interests and generally are satisfied with the decisions their companies make to address stakeholder needs within the constraints of maximizing shareholder value.

A survey of corporate directors conducted by PricewaterhouseCoopers revealed that many directors accept, at least in part, the concept of a stakeholder orientation. Four out of five directors believe that social purpose and corporate profitability are not mutually exclusive. Three-fourths believe that companies should have a social purpose. A lower but still significant percentage (58 percent) believe that stakeholder needs should be prioritized alongside shareholder needs in making company decisions.

Many directors also believe stakeholder needs should be incorporated—again, in part—into strategic planning and investment. Approximately half believe ESG-related issues should be part of strategic formulation. Slightly more than half (57 percent) say they should be part of the company’s risk management framework. However, corporate directors also believe that some of the external focus on ESG—including board diversity, environmental sustainability, and corporate social responsibility—is excessive.³⁸

Corporate executives also appear to embrace the concept of addressing stakeholder needs and claim that they currently do so as part of their long-term planning. They do not agree that increasing shareholder value requires that stakeholder needs be ignored or disregarded. A 2019 survey of CEOs and CFOs found that almost 90 percent incorporate stakeholder interests into long-term planning. They also purport to balance stakeholder and shareholder interests, and claim to be satisfied with the job their company does to meet the interests of their most important stakeholders.

Executives also do not believe that incorporating a stakeholder orientation into corporate planning requires a trade-off between short-term costs and long-term benefits. In fact, only 12 percent of CEOs and CFOs hold such a view. Instead, most believe either that investing in ESG-related initiatives is costly in both the short and long terms (37 percent)—in which case it is not worth doing at their company—or that ESG initiatives are beneficial in both the short and long terms (28 percent)—in which case the decision requires no trade-off and is not difficult to make.³⁹

Finally, many CEOs and CFOs do not believe their largest investors see stakeholder considerations as being in conflict with their financial interests as owners.⁴⁰

These are perception-based data, but they suggest that in the eyes of corporate decision makers, most companies try to strike an appropriate balance in pursuing shareholder value without imposing harm or cost on stakeholders. Most companies believe they are already sustainable.

ESG Metrics and Disclosure

The absence of reliable reporting metrics is a considerable obstacle to assessing the degree to which companies invest in stakeholder initiatives and to measuring their effectiveness. A 2023 survey by the National Association of Corporate Directors (NACD) found that the lack of uniform disclosure standards was the single greatest challenge directors face in providing oversight of ESG matters.⁴¹ If directors, who have access to nonpublic information, struggle with this challenge, then external observers no doubt find it even more difficult.

To increase transparency, some companies are disclosing information about their stakeholder-related initiatives through supplemental reports to their required financial disclosure. Examples include the following types of documents:

• Sustainability report: Describes the economic, environmental, and social impact of a company’s activities, and describes the link between corporate strategy and sustainable outcomes.

• Human capital report: Includes qualitative and quantitative information about a company’s workforce, critical skills and expertise requirements, workforce development initiatives, diversity initiatives, training, human resources policies and practices, and trends within the company.

• Climate change impact report: Enumerates the potential impact of climate change on a company’s governance, strategy, and risk management, including metrics and targets to assess and manage climate-change risk. These reports are often developed in accordance with the recommended guidelines of the Financial Stability Board Task Force Recommendations (TCFD).

In addition, many companies voluntarily disclose ESG-related initiatives in the annual proxy, including those focused on environmental matters (climate, sustainability, recycling, and renewable energy use), human capital management (diversity and employee turnover), safety, and culture.⁴² Some companies disclose their progress toward ESG objectives when justifying the annual bonus awarded through executive compensation programs (see the following sidebar).

A lack of rigorous, quantitative, and uniform metrics makes it difficult to assess the quality of stakeholder-related efforts across large samples of companies. Without uniform metrics, companies cannot effectively choose which variables to report and how to calculate them.

To address this challenge, a nonprofit organization called the Sustainability Accounting Standards Board (SASB) developed a set of standards for companies to make consistent and comparable disclosures about ESG-related issues. These standards are organized into five dimensions: environment, social capital, human capital, business model and innovation, and leadership and governance. Each dimension is further organized into three to seven general-issue categories. Additionally, SASB provides a materiality map to identify the dimensions and general-issue categories that are relevant to each industry. For example, the general-issue category “greenhouse gas emissions” is considered material to the transportation industry but the category “water and wastewater management” is not.⁴⁷

SASB standards are tailored to each industry. As a result, a sustainability report compiled by a company in the commercial banking industry would include different metrics from one compiled by a company in the casinos and gaming industry. The commercial bank’s SASB report would include metrics and disclosure language on financial inclusion through the availability of lending and savings products in underserved communities.⁴⁸ By contrast, the casino’s SASB report would include metrics on responsible gaming.⁴⁹

Despite the similarity of this organization’s name to those of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), which develop the accounting standards used to prepare public financial statements, the standards developed by SASB are not officially endorsed by the SEC. As a result, few companies include SASB metrics in their Form 10-K disclosure. Instead, companies that report SASB metrics do so through separate sustainability reports on their website.⁵⁰

Furthermore, sustainability metrics are generally not audited by a public accounting firm. In some instances, companies will engage independent third-party organizations to certify their report, although the verification procedures of these organizations are not overseen by the Public Company Accounting Oversight Board (PBAOC).⁵¹ As a result, many shareholder groups are skeptical of the quality of the ESG-related information they receive from companies. Ernst & Young found that most investors (73 percent) are unsatisfied with the ESG disclosure that organizations provide.⁵²

The research on sustainability reporting is mixed. Christensen, Hail, and Luez (2021) provided a literature review on corporate social responsibility (CSR) reporting. They found that CSR information can benefit capital markets through greater liquidity, lower cost of capital, and better capital allocation. At the same time, CSR disclosure might be associated with higher litigation risk. These authors found large variations in disclosure (length and quality) across firms, which likely reflect heterogeneity in firms’ business activities, the materiality of CSR to firms’ activities, and the perceived costs and benefits of disclosure. Because most CSR initiatives and disclosure are voluntary, it is difficult to measure their impact on performance and valuation. The authors concluded that mandatory CSR reporting standards have the “potential to mitigate negative externalities from firms’ business activities,” but “it is not a priori obvious that they would necessarily achieve better outcomes or be cheaper than a market solution.”⁵³

In 2024, the SEC adopted rules to require standardized disclosure about carbon emissions and the financial effects of climate-related risk.⁵⁴ These rules have been challenged in the courts and their ultimate form is unclear.

External Assessment of ESG

Shareholders’ and stakeholders’ demands to better understand corporate ESG initiatives has spawned a cottage industry of third-party organizations that publish rankings and ratings of companies on various environmental and social dimensions. Examples of these rankings include:

• Bloomberg Gender-Equality Index: Measures how companies “invest in women in the workplace, the supply chain, and in the communities in which they operate.”⁵⁵

• Corporate Responsibility Magazine Best Corporate Citizens: “Recognizes outstanding environmental, social and governance (ESG) transparency and performance among the 1,000 largest U.S. public companies.”⁵⁶

• Ethisphere Institute Most Ethical Companies: “Recognizes [companies] for setting the global standards of business integrity and corporate citizenship.”⁵⁷

• Fortune Best Workplaces for Diversity: Ranks companies that “create inclusive cultures for women and people of all genders, people of color, LGBTQ people, employees who are Boomers or older, and people who have disabilities.”⁵⁸

• Newsweek Green: Compiles “environmental performance assessments of the world’s largest publicly traded companies.”

Examples of ratings include:

• FTSE Russell: “Allows investors to understand a company’s exposure to, and management of, ESG issues in multiple dimensions.”⁵⁹

• HIP Investor Ratings: “Intended to be an indicator for future risk, return potential, and net impact on society, our quantitative analysis of fundamentals systematically identifies the drivers of the 90 percent of market value that cannot be found on the balance sheet.”⁶⁰

• MSCI ESG: “Aim to measure a company’s management of financially relevant ESG risks and opportunities.”⁶¹

• Sustainalytics: “Designed to help investors identify and understand financial material ESG risks at the security and portfolio level and how they might affect the long-term performance for equity and fixed income investments.”⁶²

• TruValue Labs: “Applies artificial intelligence to uncover opportunities and risks hidden in massive volumes of unstructured data, including real ESG behavior that has a material impact on company value.”⁶³

These ranking and rating organizations employ diverse methodologies. Some rely on information publicly disclosed in financial statements or sustainability reports. Some rely on proprietary surveys distributed to the company or its employees. Others incorporate information derived from the media and even press releases. Multiple sources of information are sometimes combined to arrive at the assessment.

We examine the methodologies of selected firms and the predictability of their ratings in greater detail in Chapter 14. However, several issues are worth noting here. The first issue is the availability of information. Disclosure of ESG data is primarily voluntary, and more information is available for large corporations than for small ones, because of the former’s more extensive disclosure practices, larger investor relations departments, and greater media coverage. As such, an ESG rating firm must determine how to evaluate companies with different disclosure practices.

The second issue is how to assign weightings to ESG dimensions to generate an overall score. The concept of ESG includes a broad array of somewhat disparate environmental, social, and ethical issues. On the one hand, a ranking such as the Bloomberg Gender Equality Index makes an assessment of one ESG dimension, so weightings are less of an issue in this case. On the other hand, the Corporate Responsibility Magazine Best Corporate Citizens ranking takes a broad view and must decide how to incorporate difficult-to-relate variables into a single outcome. This includes a determination of how to compute an overall score when an individual data element is not publicly available.

The third challenge is materiality. As discussed earlier in regard to the SASB standards, various ESG dimensions have different relevance to different industries. How should the environmental stewardship of an energy or manufacturing company be compared to that of a technology or service company, given their different exposures to environmental challenges (carbon emissions, pollution, waste, and so on)? Should a company be compared only against its industry peers to determine which ones handle these matters better, or can companies in different industries be compared against each other?

Each ranking or rating firm makes choices on these questions. In consequence, the ratings assigned to companies vary considerably depending on which firm assigns them. For example, MSCI ESG gives Tesla Motors one of its highest ratings for environmental performance, but FTSE Russell gives Tesla a low score on environment because its model does not take into account emissions from a company’s cars but includes only emissions from its factories. FTSE also penalizes Tesla in its social rankings because Tesla discloses little information about its practices, whereas MSCI assumes that if a company does not disclose information on a dimension that its performance is in line with industry averages. In another example, Sustainalytics gives ExxonMobil a relatively high ranking because it assigns a 40 percent weight to social issues, whereas MSCI ranks the company lower because it gives a 17 percent weight to social issues.⁶⁴

On average, large U.S. companies tend to receive high scores across the ranking and rating providers. Whether this is due to greater availability of information about these firms, their willingness to engage with rating providers to supplement information, their embrace of and willingness to invest in stakeholder initiatives, or methodological biases by the rating firms is not known.

An analysis of 11 prominent rankings of companies based on environmental, climate-related, human rights, gender, diversity, and social responsibility factors shows that 68 percent of the Fortune 100 companies are recognized on at least one ESG list. The combined market value of these companies is $9.4 trillion, which comprises 84 percent of the market value of the entire Fortune 100. Cisco Systems appears on the most lists (eight); Microsoft appears on seven; and Bank of America, HP, Procter & Gamble, and Prudential Financial each appear on six lists. Even companies that have been widely criticized by advocacy groups for their business practices are rated highly by third-party observers for ESG factors. For example, Chevron appears on the Dow Jones sustainability index and the Forbes list of best corporate citizens. Walmart is listed on Bloomberg’s gender equality index. Comcast appears on DiversityInc’s top 50 corporations for diversity. General Electric is named to Ethisphere Institute’s list of most ethical companies. Perhaps unexpectedly, Berkshire Hathaway is not named on this list, nor does it appear on any of the 11 lists reviewed (see Table 13.1).⁶⁵

Table 13.1 Fortune 100 Companies Appearing on the Most ESG Rankings

# Lists	Company	Barron’s Most Sustainable	Bloomberg Gender Equality	CDP – Climate Change A List	CDP – Water Management A List	Corporate Knights Most Sustainable	Corporate Responsibility	DiversityInc	Dow Jones Sustainability	Ethisphere Most Ethical	Forbes Best Corporate Citizens	Fortune Best Workplace for Diversity
8	Cisco Systems	x	x	x		x	x		x		x	x
7	Microsoft	x		x	x		x		x	x	x
6	Bank of America		x	x		x	x		x			x
	HP	x				x	x		x		x	x
	Procter & Gamble	x	x				x	x		x	x
	Prudential Financial	x	x				x	x		x	x
5	AT&T		x				x	x	x		x
	General Motors		x				x	x	x		x
	Johnson & Johnson			x			x	x	x		x
4	3M						x		x		x	x
	Allstate							x	x	x	x
	Anthem							x	x	x	x
	Best Buy	x		x			x		x
	Citigroup	x	x				x		x
	CVS Health		x				x	x	x
	Goldman Sachs		x	x			x		x
	Intel						x		x	x	x
	MetLife		x			x			x		x
	PepsiCo	x					x			x	x
	UPS	x		x			x				x
Number of Fortune 100 companies on list		11	20	10	2	5	34	19	29	13	38	10

Based on rankings published between 2017 and 2019.

Source: Loosey-Goosey Governance (2019).

Research has examined the relationship between sustainability scores and firm performance and risk. Berg, Lo, Rigobon, Singh, and Zhang (2023) found a positive association between ESG ratings and risk-adjusted returns.⁶⁶ By contrast, Bansal, Yu, and Yaron (2022) found that highly rated ESG stocks outperform lowly rated ESG stocks in good economic times but underperform during bad times—the opposite of what ratings providers intend.⁶⁷

Margolis, Elfenbein, and Walsh (2009) conducted a meta-analysis of 251 studies between 1972 and 2007. They found a small, positive association between CSR and performance. However, they also noted that this positive association declined throughout the measurement period; that is, the effects of CSR were stronger in earlier studies and weaker in later studies. They concluded:

After thirty-five years of research, the preponderance of evidence indicates a mildly positive relationship between corporate social performance and corporate financial performance. The overall average effect … across all studies is statistically significant, but, on an absolute basis, it is small.⁶⁸

Krueger, Alves, and van Dijk (2024) studied the performance of more than 16,000 companies in 48 countries over the period 2001 to 2020. They found little relation between ESG and performance.⁶⁹

Atz, Liu, Bruno, and Van Holt (2022) provided a substantial literature review of more than 1,100 primary peer-reviewed papers and 27 meta-analyses on ESG and sustainable investing published between 2015 and 2020. They concluded that “the financial performance of ESG investing has on average been indistinguishable from conventional investing.”⁷⁰ In general, research on ESG, similar to all observational studies, suffers from questions about causality. That is, does a commitment to environmental or social goals make a company more profitable, or are more profitable companies able to spend more on these activities?

Despite pressure on companies to engage in ESG-related activities and corporate efforts to disclose their commitment to these initiatives, our ability to assess ESG quality remains limited. Inconsistent metrics, voluntary disclosure, and lack of comparability across firms account for much of the problem. Furthermore, it is not clear whether the metrics that third-party firms develop to measure companies on ESG dimensions are accurate or reliable. (We address this issue in more detail in Chapter 14.)

As such, requiring all companies to incorporate a stakeholder orientation into their corporate planning—beyond the extent to which they already do so—would likely have unintended consequences and potentially harm shareholders, employees, and outside stakeholders alike. Governance systems today—which emphasize shareholder returns, accountability of management to a board of directors, clearly defined performance metrics, and a capital market that disciplines companies for poor performance—might have their shortcomings, but the objective nature of stock price and operating returns are effective gauges for measuring performance and risk.

One solution (and one that many companies currently embrace) is to include relevant ESG factors as key performance indicators in awarding compensation—along with other nonfinancial factors such as customer satisfaction, employee engagement, and product innovation (see the following sidebar). This gives companies more discretion and allows shareholders and stakeholders to monitor for the adoption of policies most relevant to their situation and interests. It does not solve the problem of comparability across companies, particularly when a company chooses not to disclose proprietary information for competitive reasons, but it lessens the risk that management will be held accountable for meeting measures without a proven correlation to value, thereby weakening board oversight. (An interesting, related question is whether CEO activism—the practice of CEOs taking a personal stance on social, environmental, or political issues—is in the best interests of a company. See the subsequent sidebar.)

The greatest challenge, and greatest opportunity, for ESG advocates is to incorporate a stakeholder orientation within a shareholder mandate, without disrupting the positive benefits that the current system accrues to shareholders and stakeholders alike.

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