Louisiana Law Review


Martin Edwards


Environmental and social governance (ESG) has been at the forefront of discussions in corporate law theory, doctrine, and practice. Perhaps because of ESG’s breadth, there are numerous intersections with existing frameworks, including those of fiduciary duties, securities disclosures, shareholder proposals, shareholder wealth maximization, and so on. This Article evaluates ESG in the context of the corporate contract. It focuses on how ESG fits into the current equilibrium of voluntary relationships between and among all the players involved in a corporation. The corporate contract describes all terms of all contracts between and among individuals involved with a given firm: legally enforceable or non-legally enforceable, explicit and implicit, specified and unspecified. To best understand ESG, this Article will explore the life and times of ESG in these terms, and with particular attention to Dean Henry Manne’s insights about individual maximizing behavior by managers within corporations. Consequently, this Article proposes that ESG is best understood as corporate directors and managers maximizing their overall compensation from lifetime corporate employment by following the social and personal incentives that the rise of ESG has generated. It does not follow, necessarily, that a legal solution should be forthcoming or that this is an inappropriate or undesirable way to compensate corporate directors and managers, but it does raise questions as to whether and how ESG will contribute to or undermine the long-term equilibrium. Within the corporate contract, shareholder wealth maximization represents a sort of implicit and not-fully-specified equilibrium norm that may be sketched as follows: directors are to carry out a good faith, reasonably careful process of trying to deliver a return on the shareholders’ investment. Fiduciary duties, as well as the market for corporate control and other non-legal enforcement mechanisms, represent backstops against director or manager defection from the norm. But, no such enforcement mechanisms are truly automatic or costless. For this reason, and because the norm is implicit and not fully specified, there has always been space for two eventualities: first, there is the necessary flexibility for directors and managers to take decisive action that results in maximization of the corporate surplus for shareholders⎯not to mention stakeholders⎯and second, there is opportunity for some amount of the diversion of the surplus to the directors and managers over and beyond their legally contracted compensation.