University of Pennsylvania Journal of Business Law
First Page
511
Publication Date
Summer 2024
Document Type
Article
Abstract
We are in the midst of an unusually strong flare-up of the perennial debate over corporate purpose. Prominent voices in business, finance, and politics are once again challenging the view that boards and executives should manage corporations for the exclusive, or even primary, benefit of the stockholders. Most striking, however, is that powerful institutional investors—and a growing cadre of individual investors—are also endorsing the view that returns to stockholders should sometimes take a backseat to environmental, social, and governance concerns. This has led to the rise of “woke capital”—or “ESG” investing—where investors may pressure corporate management to behave in socially responsible ways or refuse to invest in certain companies altogether on ESG grounds. At the same time, an increasing number of large issuers have begun taking outspoken positions on polarized political issues they would have undoubtedly tried to avoid in the past. Whether these developments are net positive or negative is hotly debated. Some argue that ESG investors will lead to more sustainable development and encourage corporate managers to make progress on social problems where political solutions have not been forthcoming. Others argue that ESG is primarily empty talk, a cynical marketing ploy to attract gullible customers. Still others suggest it is an affirmatively harmful development— that corporate managers are ill-equipped to tackle broad social problems and that giving them license to do so will serve only to provide cover for managerial opportunism. Lost in these debates, however, is the more fundamental question of what ESG investing portends for how large-scale enterprise will be owned and governed in the future. In short, commentators have taken for granted that large enterprises will continue to be owned—in the sense of electing the controlling managers and receiving the residual cash flows—by traditional public stockholders who provide equity capital. But the increasing salience of politics in investment decisions, by creating divergent interests among stockholders, has potentially dramatic implications for the ownership structure of enterprise. This Article is the first to explore these implications. In his pathbreaking work, Henry Hansmann showed that perhaps the most important reason for the modern dominance of stockholder ownership of large enterprises is that, out of all the potential owners, stockholders—united in their pursuit of financial returns—are typically the group least likely to be plagued by conflicts of interest that impair the ability of the enterprise to function. As alternative considerations like environmental sustainability or diversity and inclusion become more important to at least some investors, political divisions will inevitably emerge, increasing the conflicts among stockholders. These developments will tend to degrade the efficiency of widely-held stockholder-owned firms, thereby increasing the relative efficiency of alternative ownership structures, such as private, workerowned, producer-owned, or consumer-owned enterprise. As such, while the triumph of woke capital need not imperil free enterprise as such, it may herald a sharp decline in the kind of financial capitalism that has dominated large-scale business for over a century.
Repository Citation
Charles Korsmo,
Woke Capital and the Ownership of Enterprise,
26
U. Pa. J. Bus. L.
511
(2024).
Available at:
https://scholarship.law.upenn.edu/jbl/vol26/iss2/4