Milton Was Right, Corporate Governance Matters

Over the past few years, several studies have suggested that environment, social and corporate governance (ESG) investing can lead to higher returns. Some have interpreted this as contradicting the view, most famously propounded by Nobel Prize-winning economist Milton Friedman, that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open competition without deception or fraud”. However, there is no inherent contradiction. Indeed, corporate executives who claim that they are pursuing ESG objectives but are, through their “ESG” activities, adversely affecting profitability, may in fact be harming society. At a macro level, the profusion of indices and other metrics supposedly designed to assist in the selection and implementation of ESG investments may well be doing more harm than good. Investors who want to do well by doing good would be wise to avoid these box-checking activities, and instead look deeper so that they may understand the particular circumstances of individual firms and the opportunities and threats they face.