Amid growing concerns about climate change and social unrest, institutional investors are increasingly applying environmental, social, and governance (ESG) criteria in their portfolio decisions. Yet while ESG factors are important for investors to consider, the new focus risks obscuring an even bigger issue: the role that corporations play in the democratic process.
The Universal Declaration of Human Rights (Article 21, Section 3) stipulates that, “The will of the people shall be the basis of the authority of government. This will shall be expressed in periodic and genuine elections.” Democracy therefore is a human right, which means the first social responsibility of business – be it a sole proprietorship or a multi-trillion-dollar company – is to refrain from undermining democracy, either at home or abroad.
Many will consider this point obvious or irrelevant. What do corporations have to do with democracy? In fact, many corporations play a leading role in distorting the democratic process, the proper function of which is to transform popular will into legislative action. Let me illustrate the point with examples from the United States, which used to be considered the world’s most advanced democracy.
In 2019, Ohio’s Republican-controlled state legislature passed House Bill 6, which provided $1bn in subsidies to bail out FirstEnergy Solutions, a nuclear-plant subsidiary of an electric utility. 
The bill was hardly an expression of the will of the people of Ohio. On the contrary, a dark-money group, Generation Now, has since pleaded guilty to charges of carrying out a massive bribery scheme to secure approval for the bailout. Generation Now backed the campaigns of 21 different state-level candidates, including the Speaker of the House, Larry Householder, who also received more than $400,000 in personal benefits.
And if this was not bad enough, when Ohioans started collecting signatures for a referendum to abolish HB6, Generation Now launched an ad campaign claiming that the Chinese would take over the state’s power grid if the repeal was successful. A local news outlet also found that the group had “hired ‘blockers’ who followed, encircled, harassed, and (in a couple cases) physically hit petition gatherers.” It was later revealed that Generation Now was founded with $56.6mn from FirstEnergy Solutions, but this scandal would never even have been exposed if not for an FBI investigation.
Since this episode seems to belong more in 1950s Guatemala than in twenty-first-century America, can we dismiss it as an isolated case, limited to one bad company, one state, or just the Republican Party? Unfortunately, we cannot. It is a truism in American politics that, “As Ohio goes, so goes the nation.” 
In nearby Illinois, Exelon Corporation agreed to pay a $200mn fine for a long-running bribery scheme in which the utility gave jobs and contracts to associates of Illinois House Speaker Michael Madigan, a leader of the state’s Democratic Party.
Again, the only unusual aspect of this story is that the perpetrators were caught. A recent paper in the Quarterly Journal of Economics provides systematic evidence of the many ways that corporate money is routinely funnelled through not-for-profit organisations to influence political outcomes behind the scenes. The actions documented in the paper are legal, but that does not make them socially responsible.
Corporate influence on the American political process is not only burdening our public finances and devastating our environment; it is also fundamentally undermining our democracy. Democracy is worth preserving if it performs the function of transforming voter preferences into policy. But if it is failing at that, why keep it? After all, democracy is neither efficient nor cheap to maintain. If voters cannot trust their elected representatives to represent them, they will throw their support behind extremists who are willing to tear down the corrupted system.
Given the stakes, not interfering with the democratic process should be the primary social responsibility of any business. ESG considerations are important; but if a company fails on the D (democracy) criterion, it doesn’t matter how well it appears to perform on ESG metrics. As the FirstEnergy and Exelon scandals show, the risks of playing dirty can easily swamp the benefits of purported ESG alignment. By contrast, if a company fulfils its D requirement but falls short of the ESG ones, political governance can still be counted on to help fix those remaining problems. That is why D must always come before ESG.
The first principle of responsible investing, then, is to ensure that corporations are not violating or rewriting the rules of the democratic game, either at home or abroad. This is perfectly doable, and it starts with requiring full transparency on where corporate money is spent. The US Supreme Court’s 2010 Citizen United decision may have cleared the way for unfettered corporate money in politics, but it does not protect the right of corporations to make such expenditures without informing their shareholders.
A public initiative to force this kind of transparency is gaining momentum. On average, support for shareholder proposals demanding disclosure of political spending has increased from 36.4% in 2019 to 48.1% in 2021. If the three large institutional investors – BlackRock, Vanguard, and State Street – endorse this principle, it could become the norm for all major companies in America. Would full transparency stop corporations from distorting democracy? It would go a long way, because it would expose their corruption (whether legal or not) not only to their shareholders, but also to their customers, employees, and regulators. The moment to act is now. Tomorrow might be too late. — Project Syndicate

? Luigi Zingales, Professor of Finance at the University of Chicago, is Co-Host of the podcast Capitalisn’t.

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