Many people, including some policymakers, are skeptical about the imminence of ecological disasters and the threatened habitability of planet earth. President Trump’s administration has repealed the Inflation Reduction Act (IRA), abandoned Diversity, Inclusion, and Equity (DIE), and jilted information about a key metric: carbon dioxide concentration in the atmosphere.
The focus on ESG is being perceived as the hoopla of the activists. If they do not repudiate, they ignore the UN’s estimate of 4.5 degrees of warming by 2,100 with a business-as-usual scenario. In their book “Climate Shock”, Gernot Wagner and Martin Weitzman outline an 11% chance of overshooting six degrees. At that level of heat, the habitability of humans at the equator and in tropical areas will be a question mark. Many pundits estimate that the ice sheets will melt at two degrees, 400 million people will face water scarcity, and India will encounter thirty-two times as many extreme and prolonged heat waves.
Earth has experienced five mass extinctions in the past, each wiping out even the evolutionary fossil record. All but one was triggered by climate change, caused by greenhouse gases. The asteroid caused only one annihilation of earth, which killed the dinosaurs. Current trends do not obviate the possibility of another extinction. The effort of Elon Musk to colonise Mars for the survival of humanity may not be empty madness.
The industrial revolution and innovation of joint stock companies (JSC), also called firms with a common seal, perpetual succession, and separation of management from ownership, have led to urbanisation, specialisation, organisation of work, people and processes, and growth and prosperity. The combination of the Industrial Revolution and JSC has enabled the multiplication of human endeavors, the creation of wealth, and the uplifting of billions across geographies. Yet not everyone is on board, and millions are still in the grip of extreme poverty. The freedom to live is the foundation of the UN Human Rights Charter. Nobel Laureate Joseph Stiglitz writes in his book, ‘Road to Freedom’, “People living on the edge have no sense of freedom”.
Friedman Doctrine (propounded by Martin Friedman, a Nobel Laureate Economist and an influential voice of his time), Shareholders’ Primacy, provided management a license for profit maximisation and expropriation of most of the riches by the shareholders. Lynn Stout, renowned legal luminary, has famously said, “Shareholders’ primacy became a dogma, a belief system that seldom questioned, rarely justified, and so commonplace, most of its followers could not even recall where they had first learned of it.” Mindless exploitation of resources and inequality are the outcomes.
Separation of management from ownership gave birth to the agency problem, first identified by the father of modern economics, Adam Smith, which is the core issue of corporate governance. Causes of corporate misdemeanors and governance failures can be traced to conflict of interest, inappropriate remuneration, inadequacy of transparency, lack of diversity, risk blindness, and accountability to all stakeholders, overarched by the absence of board leadership and dearth of ethics.
State institutions, directly and through independent regulatory bodies, have been aware of corporate governance failures for a long time and of the destruction of ecology and inequality for some time. Elaborate frameworks have been laid down for each of the aspects. However, the compliance ends with a box-ticking, form of compliance. Consequently, the impact of the measures taken is albeit marginal.
The sustainability of corporate success and the country's economic performance are closely linked. Hence, their performance must be evaluated in conjunction with the performance of ESG. This necessitates the perambulation of form to the substance of compliance. Box ticking is an enabler, but it is of little use without assessing the impact of all the steps taken.
Compliance with the environment norms must be appraised by reducing carbon footprints at all three levels and progressing toward net zero. Corporate governance has to be gained from the economic value added and sagacity of sharing with all the firm's stakeholders. Stakeholders’ primacy should replace shareholders’ primacy, and residual profits must become part of stakeholders’ funds rather than shareholders’ funds currently. The use of CSR funds, the share of society in profits, must be assessed by the impact on reducing inequality and enhancing inclusion.
In a new book, Charles Sabel and David Victor of the University of California, San Diego, build an effective governance model via collaboration. They architect their model based on the example of the 1987 Montreal Protocol, which succeeded in curbing depleting substances (ODS) to a point of full recovery of the Ozone Layer. Firms and governments must collaborate to address environmental protection and optimal value creation through efficacious governance and social stability.
Planet earth is at an inflection point and hanging on a cliffhanger. “Climate change is also inarguably, a saga in which we are all implicated, and which threatens to deform all our lives should we not change the course”, concludes David Wallace-Wells in his book, ‘The Unhabitable Earth’. The genius of capitalism can invent ways to capture the benefits of energy, opportunity, and collaboration. The substance of the efforts alone can retrieve the situation. It is now or never.
The author is Former Chairman, LIC & SEBI; Chairman, GoVeva; and Founder, Promoter, MD & CEO, GoVeva. Views are personal.
