Business Studies

In our first lecture, we introduced the goal of the firm to be for the financial manager to maximize the wealth of the common stockholders. The argument was made that by maximizing the present value of the shareholders’ position as the residual claimant in the firm, that other stakeholders (e.g., labor, suppliers, customers, creditor, the government) would be suitably protected.

In the U.S., corporations incorporate themselves in states and their corporate charters are subject to state law. Most state law governing corporate goals recognize the board of directors as having primary duty towards the shareholders of the company. Some states allow (or even insist) that companies consider the impact of their decisions on stakeholders other than the shareholders.

In recent years, there have been developments to make corporations and their boards more sensitive to the impact of their decisions on issues like sustainability (Corporate Social Responsibility).

Furthering these efforts, a large proportion of investment funds in the US economy have taken on the mantle of ESG (Environmental, Social, Governance) issues and prepare a scorecard for companies to assess their suitability for investing in their portfolios.

Write a short essay (no more than two pages double spaced, 12 point font with 1 inch margins, taking up the question of what do you think the duty of the corporate board should be with respect to ESG issues?

With respect to first understanding what ESG issues are and what the debate is, read the following article from US News and World Report.

https://www.usnews.com/news/business/articles/2022-05-19/explainer-esg-investing-and-the-debate-surrounding-it

The question is whether the board should be responsible for reporting its impact on issues like ESG and should consider the impact of such considerations when making financial decisions (such as investment decisions) or whether it should focus solely on the impact of their decisions on the shareholders’ investment. I.e., if there are environmental issues or societal issues that the government believes they should address, they should be addressed through regulation. (Notice these goals need not conflict).

There is no right answer in this essay. I just want you to start thinking about writing and getting some practice. I also am curious what your thoughts are.

Your essay should start with a thesis paragraph, stating what you conclusion is and the major factors leading to your conclusion. The subsequent paragraphs should be organized by major factor offering support towards your conclusion. Your concluding paragraph should largely reiterate your thesis paragraph.

Look up supporting articles on the web. Site all your sources in a Sources Ctied page.

**MAKE SURE TO READ ALL THE DIRECTIONS**

ANSWER

ESG Issues

The ESG approach means considering the company’s performance on environmental, social, and other issues before deciding whether to invest or not invest. Socially conscious investors use the ESG criteria to screen potential investors. In the past few years, there have been financial pressures from many sides resulting from the pandemic (Matos, 2020). Those who take a broader view of their long-term strategy are in a better position to confront the world’s financial challenges today. Therefore, the board should be involved and responsible for reporting the impact of issues like ESG, and they should consider the impact of its considerations when making financial decisions.

ESG has become popular across a wide range of investors. Understanding the environmental, social, and governance issues could be helpful in making decisions on where to make investments (Gillan et al., 2021). The world is rapidly changing, and companies cannot only be on the narrow question of financial performance. A broader view of the world could give organizations a better view of investment decisions (Berg et al., 2019). Boards should consider taking responsibility for ESG setup, follow an oversight protocol, influence behaviors through compensation, and report with caution.

ESG investing is also known as sustainable investing or socially responsible investing. In the changing financial times, the board should not focus solely on making their shareholders money but should also be responsible for reporting on the issues. The financial climate of changing, and thus reporting the impact of the decisions they make should be the responsibility of the board. This also helps the investors as they can make decisions depending on the impact they will make. It also opens up new areas of investment and prepares investors for the future.

References

Berg, F., Koelbel, J. F., & Rigobon, R. (2019). Aggregate confusion: The divergence of ESG ratings. Forthcoming Review of Finance.

Gillan, S. L., Koch, A., & Starks, L. T. (2021). Firms and social responsibility: A review of ESG and CSR research in corporate finance. Journal of Corporate Finance, 66, 101889.

Matos, P. (2020). ESG and responsible institutional investing around the world: A critical review.